Webcast replay: Women and investing: Unique situations, practical suggestions
November 21, 2013
Replay and transcript from a recent Vanguard webcast
Women face some unique issues when it comes to investing and financial planning. Research finds that on average, women live about two years longer than men but tend to earn less. In this live webcast aired Thursday, November 7, 2013, Catherine Gordon and Sarah Hammer with Vanguard's Investment Strategy Group, along with Karin Risi, who leads Vanguard Advice Services, discuss steps you can take to help handle those situations and advance toward investing success.
Rebecca Katz: Well good evening to you and welcome to this live Vanguard webcast. I'm Rebecca Katz. And whether you're beaming in from your smartphone, your tablet, or your desktop, we are so glad you could be here tonight with us this evening. So tonight we are talking about some of the unique issues that women face when it comes to financial planning, and there are unique situations.
For example, many of you probably know women live longer, generally, on average, about two years longer than men. Also, what you might not know is that women are now almost half of the workforce and either the equal or primary breadwinner in the family in over 40% of households. That was a surprising statistic to me. Women now earn the majority of undergraduate degrees and graduate degrees, yet, alas, we still earn less than our male counterparts, on average.
Research also shows that women generally feel more confidence than their male peers when it comes to saving money, yet less confidence when it comes to making investing decisions. So our conversation tonight will look at all of these facts, and we'll discuss how women should consider them when it comes to financial planning. And joining me tonight are three of Vanguard's experts. We have Sarah Hammer and Catherine Gordon from Vanguard's Investment Strategy Group and Karin Risi, who heads Vanguard's Advice Services Group. Thank you for being here, ladies.
Sarah Hammer: Thanks, Rebecca.
Catherine Gordon: Glad to be here.
Karin Risi: Thanks.
Rebecca Katz: So one caveat about tonight's program: We will be answering your questions based on research and based on our experience with millions of Vanguard investors. But there are thousands of you watching this webcast, so we do have to respond using sort of a broad brush and some generalizations. So some of the things we say may resonate with you, as a woman, or someone that you know, and some you may say don't sound like me at all. And that's okay. I mean, even among the four of us, we all have very different approaches to money. We're different ages, we have different family situations, we have different work histories. And that's okay. We are going to do our best to talk about issues that impact women broadly, but we will also address some of the many very specific questions that have already come our way.
And, of course, like every webcast, we welcome your questions. You can send them in through your desktop or you can tweet them to us. I have a tablet here, and you can use the #VGLive, and we'll take some of those Twitter questions as well. So does that sound like a good plan for tonight?
Sarah Hammer: That sounds great.
Catherine Gordon: Good.
Karin Risi: That's great.
Rebecca Katz: Well, what we normally do is we ask our audience a question to kick us off and get started and learn a little bit more about you. So on the right-hand side of your screen you should see our first polling question. Check to make sure your browser settings are at 100% zoom level if you can't see it. And our question is, "What is your most important investing goal? Is it retirement; education for a child or a grandchild; funding your future health-care spending— that's top of mind this time of year; or maybe you don't have a specific goal; or something else." So please respond now, and in just a few seconds we'll come back with those responses.
So we have tons of questions coming in. We took tons of questions when people registered, so I thought we could just jump right into some of those questions. So our first question is from Cynthia in Austin, Texas. Thanks, Cynthia. And she says, "I hope this webcast speaks to those women who know nothing at all about financial planning. I am new to learning all of this. Thank you." So that seems like a common sentiment among many of the people who asked questions. So, Catherine, you're in the middle, why don't we start with you?
Catherine Gordon: I think it's a great first question. And first, congratulations to Cynthia for acknowledging that she feels a bit overwhelmed, and there's a lot to learn. And it can feel overwhelming, and hopefully tonight we can minimize or at least address some of those concerns. And as I heard the question, I'm reminded of the ancient Chinese phrase, "A trip of 1,000 miles starts with a first step." So if Cynthia could start and others listening in could start with the first step, gain that confidence to the second step, pretty soon they'll be well into that trip of 1,000 miles.
Rebecca Katz: That's great. We have a lot of questions that I think will help level set some of the basics of financial planning tonight, but we also have some more advanced questions. We're going try to chunk them out so we get to a little bit of everything and no one feels left out.
We do have those poll results in. So we asked you what are your primary financial goals, and we have, let's see, 78% of our viewers said, "retirement." Well that's not really a huge surprise. Thirteen percent said "they didn't have a specific goal or some other goal that we didn't mention." About 6% said "funding health-care needs," and only 3% said "education for a child or grandchild." Does that surprise any of you?
Sarah Hammer: I don't think it's surprising, especially given what you said at the beginning, Rebecca, about women living longer. Just thinking about what your needs will be when you head into retirement and women entering and maybe leaving the workforce for a period of time as well. But I think those other issues that are mentioned in the poll question also are issues that we all think about, thinking about education, for example, for your children.
My husband and I have three small children, and one thing that really strikes us is kids just grow up so fast. So setting aside that time to think about if you're going to be involved in financing your children's education continues to be an issue that we all think about from time to time.
Rebecca Katz: Especially when you have multiple children. I only have one so it's a lot easier.
Sarah Hammer: Well, it's a challenge for all of us, that's for sure.
Rebecca Katz: So we have our second question that I would like to ask our audience, and I think this may get back to our first viewer question. So the polls on your screen should say, "When it comes to making investment decisions, how confident are you?" So I shared that statistic that many women don't feel confident, but let's see what our viewers actually think. Are you "very confident," "somewhat confident," or "not confident at all" in making investment decisions? So we'll come back with those results in just a few seconds.
Are we ready to take another question?
Catherine Gordon: Sure.
Sarah Hammer: Sure.
Rebecca Katz: Okay. Our next question is from Nathanielle from Welllington, Florida. "I have a poor financial history. Now I'm paying back debt and trying to fix my credit. I'm a single mom of four, and I can only do so much on one income. I'm afraid I won't have enough to retire on. I've just started my 401(k) this year. What should I be focused on?" Sarah?
Sarah Hammer: Well, that's such a complex question, Rebecca, and I guess the first thing that we would say would be thank you to her for writing in because actually it's something that a lot of people grapple with. Having multiple goals and multiple needs and then feeling like a lot of times your financial needs are competing needs and wondering how you can meet all of those needs.
So I think the first important thing to recognize is that it is possible to address multiple goals, if you prioritize and you plan. And when you're dealing with a lot of different issues, like it sounds like she's dealing with debt, with credit, with retirement, a single income, and having children, a lot of the time what we will tell people is that you should first think about your credit history if you do have a negative credit history.
And all credit history means is each one of us has a history of if we repay our credit cards, or if we have a mortgage, or if we have a lease on a car, how do we make those payments? Are we making them on time? Are we making them in full? Do we have debt that we're not repaying? And if you miss a payment or you're not paying your debt down, then you can develop a negative credit history over time, and that can really impact you in a number of different ways. It can make it hard to take out a loan in the future. It can make it hard to get utilities, and it can actually affect your employment. Sometimes employers will go out and look at your credit history.
So when someone's in that situation, it makes a lot of sense to start by just getting your credit history. Go to one of the national credit bureaus. You can find information online, and get one of those free reports. Look at your credit history. Identify the issues that are there, and then make yourself a plan and start to pay down that debt over time. Set up your monthly payments, and when you are successful in paying down your credit cards, keep your cards because it actually continues to establish a track record of good credit. And that can reap a lot of benefits over time. So you have to be persistent, and you have to be patient about it, but it can be done.
Rebecca Katz: But when you think about those competing priorities—saving retirement, saving for her children's college, and debt—is that debt issue really the top priority?
Sarah Hammer: It's really one that should be addressed from the get-go because, unfortunately, if you have a negative credit history, then it can affect all the other aspects of your financial life. So, they're all important goals; I mean we'll be talking about all of them here today, I'm sure. But that's definitely one that you want to address from the get-go.
Rebecca Katz: Okay, great. We have the results in from our last poll, so let's take a look at that, and then we'll cycle right through. That'll be the last question for you, and you can just keep sending them our way.
So we asked how confident are you when it comes to investing decisions? And 50% of our viewers said they are "somewhat confident," so that's good, and maybe normal since you're Vanguard investors and tuning in; 37% said "not at all confident"; and 13% of our viewers said "very confident."
Karin, does that surprise you?
Karin Risi: I'd say it's probably similar to the distribution we see among our clients, male and female, but generally less confidence demonstrated from our female clients. So, no, it doesn't really surprise me.
Rebecca Katz: Okay, great. Well, let's take another question. This one is from Gary, who I assume is not a woman. Gary says, "How do you get traditional women to engage in these discussions? I'm trying to address this topic, but my spouse leaves it all to me. I need help."
So, Karin, you said you work with both male and female clients in Advice Services. What do you do to try to get the women involved who might be a little bit reticent to do so?
Karin Risi: Yeah, first I would say, it's such a common concern. So Gary's spouse is really fortunate that he cares enough to want to get her involved. And I sense from the question, the way the question is worded, that his spouse has no interest, right? Some women, you know, we're generalizing, this isn't all women, but some women would rather have a trip to the dentist than to manage their finances or even have a discussion about it. And, unfortunately, the data would say you don't really have a choice. Nine out of ten women—90% of us—at some point in our lifetime, will be the sole financial decision-maker.
And oftentimes reluctantly, by a death or divorce, primarily, or choosing to stay single. So you don't really have the option of putting your head in the sand, and I think Gary's recognizing that and wanting to engage his wife.
And I think there's a couple of things you can do. So what can Gary do? I think the first step is communicating, right, opening lines of communication, explaining to his spouse why it's so critically important. Having a discussion about shared financial goals. If Gary has been the primary financial decision-maker for an extended period, it may be that the first step is a good discussion between the two to say, "Do we actually share the same goals and wishes?" Once Gary is gone, what happens, and have they had that discussion and that communication?
Something called the "financial inventory" is also really helpful, and thinking about how to start that, we have resources on our website, on vanguard.com. You can search personal financial inventory, I think it is, in the search bar,and we'll give you a template. But it's so important that Gary and his spouse both know all of the accounts, where they're located, what the passwords are, the wills, the estate planning documents, the insurance policies—all of the things that make up your financial life. You know, there needs to be that information shared. It needs to be stored somewhere safe and easily accessible. It sounds like the basics, and that's where I would start. You start with the basics, and you make it approachable.
Gary could also think about talking to his spouse about things that are relatable—the household income and expenses—getting a good handle on that now. Perhaps his spouse doesn't do the budgeting for the household. Maybe she does, maybe she doesn't. But that's a good place to start. It's the first step, as Catherine said, the first step. But it's by no means an uncommon occurrence. We work with a lot of clients who struggle to really bring the spouse in.
You know, Catherine and I were talking a little earlier. I was startled to find that the average age of widowhood is 59 years old. That's much younger than I would have expected. So not everybody has the luxury of ignoring it.
Rebecca Katz: Right. I have to say that in my household the roles are a little reversed because I work here at Vanguard. My husband and I have talked about these things. I've done these webcasts on estate planning, and it makes me want to go home and get my estate plan in order and talk about money. And my husband really feels like we're jinxing ourselves if we do that. If you address it, then something bad may happen. And it's been an interesting conversation to have to evolve over time to really get our arms around that.
Sarah Hammer: One thing that Karin said that really, I think, resonates is the idea when you have the discussion with your spouse about identifying some of the goals. That can be a catalyst to bring the conversation together. So, for example, if you and your spouse, in the course of talking, have charitable goals in common, or maybe you want to buy a house, something to that effect, then that can be a way to bring the conversation forward and move forward and take some of those actionable steps that Karin talked about.
Rebecca Katz: So, we actually just got a question in on Twitter, which is also about sort of taking that first step. This is from Allison Marcus. Thanks for the tweet. She says, "I recently took over my finances from my parents, and I'm 25. What should I do first?"
Allison, I'm going to assume, we could assume that you mean that you're taking charge of your own finances, or maybe you took charge of your parents' finances. It's not clear, but maybe we can kind of address both.
Catherine Gordon: Actually one of the questions we got earlier was from a young woman, let's assume she's 25, in this case, who's trying to start saving and set priorities. I'm not aware of the credit history that the first question was involved with. But we've actually thought about what should the priorities be for someone getting started. And, again, it can be daunting because even at Vanguard we suggest that people save between 12% and 15% of their compensation. And, well, "What do you mean? I've got student loans to pay off. I'm paying rent for the first time. I've got car insurance, disability insurance, and all those things are important, so how do I prioritize these?"
So our suggestion would be, if we had to prioritize, first and foremost—again absent a credit history issue—first and foremost, your employer's retirement plan. For many people in this country it's a 401(k) plan through a corporate plan. Teachers and health-care workers might be covered, are likely covered by a 403(b) plan. State and municipal employees by a 457 plan. So I wouldn't be too intimidated by the numbers. They're all pretty much savings vehicles and really signing up for that as soon as possible Fortunately, many companies these days will automatically enroll someone into the plan, but that's just getting started.
And rather than assume 12% to 15%, maybe start small. I'll start at 1% this year, I'll go to 2%. And we actually ran a couple of scenarios that, assuming a 25-year-old starts at 5% and commits to increasing to where they get to the 12% or 15% by the time they're 30, just to give you a sense of, sort of the order of magnitude of how important it is to save early and the power of compounding.
So let's assume a starting salary of $40,000. So saving 15% by age 30, by the time this person is 65, they'd have $633,500 saved. Now if that same person said, "I can't do that. I'll start deferring 15% until I'm 35," so even that 15%, that much higher level, by the time they're 65, they've accumulated $435,500. So a significant, as hard as it is to start early, it has a huge impact; and we're assuming a 1% salary growth and net of inflation. But just to give people a sense of how important that is to be in that plan.
And then the second would be the credit, make sure you pay off credit card debt, start an emergency fund, and kind of go down from there. But first and foremost, it's the saving for retirement because just as we found from the poll, that is a huge concern for the people in the audience.
Rebecca Katz: That's great. So, Allison, you tweeted back. I know we answered your question because you were talking about yourself, so that's great. I love this, this is great. Real-time feedback.
We have another question in from Rebecca in Alexandria, Virginia, who says, "I'm a stay-at-home mom for at least seven years. Should my husband and I be contributing to the spousal IRA during this time? We currently have our emergency savings. We have college funds begun for our children. And my husband contributes to his 401(k) up to the level that his company will match contributions." So a spousal IRA, you might want to start with defining what that is, and then we can talk about whether that makes sense for Rebecca.
Up to you, Sarah?
Sarah Hammer: So I'm just so impressed. It sounds like they have their finances in order. I think the answer would be, yes, a spousal IRA is simply an IRA for a spouse; and in this case, she's staying home with the children, and it sounds like they're contributing to her husband's 401(k) which is great, maybe getting potentially an employer match there. But any time you contribute to an IRA, you reap tax advantages, and you reap the advantages of compounding that Catherine talked about. So any time you have the ability to do that, it makes a lot of sense. And whether you're staying home or working, that can help protect you in retirement. So definitely, absolutely. But congratulations to her because it sounds like they have their house in order, so that's terrific.
Rebecca Katz: Our next question—we're getting lots of questions so we're going to try to move through them quickly—is from Caroline in Washington, D.C., who says, "Where should people about to retire put their money, because both bonds and stocks seem likely to drop in value when the Federal Reserve withdraws the cheap money from the economy?" The Fed has been propping up the economy a little bit with some programs and has talked about tapering those off, and people are worried about the markets. So this is someone at the other end of the spectrum from our younger investors. What should Caroline consider?
Catherine Gordon: I think one of the things that we counsel our clients is to try to distance your financial objectives from what you read about in the paper or hear about what's going on in the news. And, of course, the government shutdown, the Fed, where people in Europe, any one of a number of investment concerns, they're always on the horizon. And even for someone about to retire, that could be—we talked about some of the longevity numbers—someone retiring at 60 or 65, there's a pretty good chance that's a 20- or 25-year time horizon. And just what's going on today in the market does not really, is not going to have an impact. And for people to sort of be making investment decisions on that, I would say, all right, that's today's concern. What happens a year from now when it's replaced with something else? Do they trade the portfolio again? So we really try and encourage people to separate the signal from the noise, is sometimes advice that we often give. And, Karin, I don't know if you want to add.
Karin Risi: No. I mean, I think we would say largely the same thing. But on the one hand, you want to encourage investors, all of our investors, for being up on what's happening in the markets and the economy. You never want to discourage that, but it is really about sort of keeping your eye on the long-term goal. And I couldn't agree more with Catherine, obviously, that if you have an asset allocation and you have your goals set, it's really about having broadly diversified market exposure at the lowest cost you can get, and staying disciplined.
And having that balance, the goals, the discipline, it's really a lot of what we espouse at Vanguard, but it works for the long term. And the one thing that can derail you from—well there are many things, I suppose, that could derail you—but one of them is not having the ability to kind of separate the noise from keeping you on track. So that that discipline and the behavioral coaching aspect is really important.
Rebecca Katz: We are just all historically very bad at timing the market, both in and out. We actually got a follow-up to the comments about how much to save for retirement. So I do see your tweet out there, Tamika, and she says, "You must be out of your mind, you three," because she's 40 with three kids and can barely save 9%. So are there any things that she can do to catch up? We talked about 12% to 15%. That's Vanguard's recommendation for how much you need to save for retirement, but for many that may seem really unrealistic.
Karin Risi: And I think that's very fair, right. So 12% to 15% is the ideal, and Catherine talked about how that can really situate you really well for retirement. But, of course, not everybody's able to do that. That's one of the reasons, the auto step-up feature that is available in many employer plans is appealing. You can start with it, I think Tamika said she's saving almost 9%, is that right?
Rebecca Katz: She can barely save 9%, but nine's a big number.
Karin Risi: Listen, 9% is good. I think 9% is great, and what Catherine didn't mention—but it's also in the same body of research that I know she's drawing that from—is that the average participant is at 10%. So not everybody is hitting 12% to 15%, and on average it's closer to 10%. And so Tamika's really right within striking, she's right in the zone. So we don't want to be discouraging. We want to be really clear that I think 9% is great, and many people start with 2%, or 3%, or 4% or—
Rebecca Katz: Or none.
Karin Risi: Or none.
Rebecca Katz: A lot of participants don't enroll in their 401(k) plans. A lot of investors get to their employer and put it off.
Catherine Gordon: I think it's also important to point out that retirement, not everybody fits in the same retire—retirement doesn't look the same for everybody. Some people might spend more. Some people might spend less. Some people may relocate. Some people may not. Some people, again, have larger lifestyles than others. It's just what's important to that particular person as to how much I'll need in retirement. So I think it's also important to ask that question, "What do I think it might look like," because sometimes I think there's sort of this image of retirement out there that doesn't fit for everybody.
Rebecca Katz: Right.
Karin Risi: I'd also suspect that at the age of 40 Tamika might be balancing multiple goals, as Sarah talked about earlier. So it's quite likely that she's not funding just her retirement savings, and she's also thinking about perhaps education. So we should all give ourselves a break. We're funding multiple goals at once, and at different stages in your life, you can put more toward different goals.
Rebecca Katz: That's great. One more tweet and then we'll go back to some of our desktop questions. This is from Madeline Chan who says, "I want to invest more, including trading, but I don't know how to start." So switching from savings to investing, are there some good tips for someone who really does want to start investing in the markets, and how do we feel about trading?
Catherine Gordon: Yeah, I think we do make a distinction between saving and investing. Saving is really for the very short-terms goals, pretty much a year or under three years. Pay the mortgage, down payment on a house, wedding, college tuition, whatever. That money should be safe.
Investing is more for goals that are longer term—college savings, retirements—and to echo what Karin said a minute ago, keeping a very long-term focus, be as broadly diversified as possible, and pay attention to costs because of all the things that we look at that influence future returns, how much you pay for your investment is actually the best predictor of future returns. It's the one thing we can control. We can talk about the markets, we can talk about how much risk, but we really can't control either. So paying attention to how much someone is paying for their investments is critical.
Rebecca Katz: And for those who may not know what to look for, what are some things that they can look at to show how much they're paying?
Catherine Gordon: So in the mutual fund environment, that would be the expense ratio, and that's the amount that is deducted from the fund that pays the investment manager, pays the various administrative expenses, legal, all the things associated with managing a mutual fund. And so, in this case, the lower the expense ratio, the less someone is paying for that fund. And again, our work suggests funds with the lowest expense ratios actually have—that's the best predictor of future returns.
So I think—and I'm sure Sarah and Karin have opinions on this as well—really investing is something that you can hold on to for the long term.
Sarah Hammer: The other thing that you mentioned, Catherine, is diversification. And when we talk about our investing principles here at Vanguard, that's something we really emphasize with our clients. And all that means really is just don't put all your eggs in one basket. So if you are thinking, in this case, about investing, a great option might be a Target Retirement Fund which offers a mix of stocks, bonds, and cash and then sort of glides along what's called a "glide path" over time as you get closer and closer to retirement and within retirement. Or even just thinking about index funds which are diversified. Within stocks, for example, you'd have many different stocks. So diversification is the other thing we talk about a lot with clients when they're getting going with investing.
Rebecca Katz: And just to clarify, so the glide path, basically the fund becomes more conservative as you get older.
Sarah Hammer: Yes, yes. So in a target retirement fund, it's a mix of stocks, bonds, and cash, which tend to have more stocks when you're younger. And then as you get closer to retirement, the amount of, or the proportion of, stocks will be reduced, and you'll have more bonds and more cash going into retirement.
Rebecca Katz: And there are similar types of investments in many college savings plans. So as your child starts off young and gets closer to college, they get more and more conservative, too, right?
Sarah Hammer: That's right. There's a glide path that glides along in our 529 plans as well. And a lot of different options available and guidance available on the website for both of those.
Rebecca Katz: Okay, we have a clarifying question about our 12% to 15% number. It seems really big, but when I think maybe when you look at it from more of a dollar perspective, maybe, it's a little bit more digestible.
Amanda from Boston, Massachusetts, says, "Is the 12% to 15% recommendation inclusive of how much an employer may also be adding?" So if your company has a match—
Catherine Gordon: Yes, it is. It is. I should have mentioned that.
Sarah Hammer: That helps.
Catherine Gordon: So someone's on a very generous employer match, employer's matching up to 3% you can get to—
Rebecca Katz: Some are 4% or 6% if you're really lucky.
Karin Risi: And we can't encourage people enough to take advantage of that match. It is truly free money in the true sense.
Catherine Gordon: Right. And just to sort of put that, again, in perspective, it's the rare person's situation who can say, I can do 12% or 15% today. The point earlier was sort of, take small bites. Gradually grow into it, so by the time you are able, some of the competing financial priorities—your kids are out of college, or you paid off the house, or whatever—then you at least you've got something you've started with, and you can increase to that 15%. So really small bites, small steps.
Rebecca Katz: Yeah, baby steps. We have a great question in on Twitter from Karen, who says, "Besides not starting early, what are some of the other key and avoidable mistakes that people make when deciding on investing?" Maybe each of you has a mistake.
Karin Risi: Yes, there are so many, right.
Rebecca Katz: Not that you've made yourselves.
Karin Risi: No. There are a few, right. It's hard to prioritize the biggest mistakes, but we could certainly speak to common mistakes. I think one of the biggest is not having a plan, so not taking the time to think about your goals and think about what are you actually saving for, investing for, as the case may be. So certainly we could say, not having a balanced portfolio, etc., but at the highest level, I think, not having an eye toward what are your long-term goals is a common mistake.
The question was brought up earlier about trading. I think frequently feeling compelled to too frequently transact on your portfolio because you want to feel like you're being active or proactive in doing something. We'd recommend that you rebalance perhaps once a year or twice a year. Certainly look at your accounts as often as you like, quarterly seems reasonable to kind of revisit and review. But often nothing is required. If you have an asset allocation in place and you have your goals set, and you can withstand the temptation to act, so I think those are two things. Not having a plan and feeling compelled to act too often on your portfolio.
Rebecca Katz: Any others?
Catherine Gordon: Yeah, I would say, certainly related to what Karin said, not investing according to the headlines. That just becomes a revolving door and a trap, so try and distance yourself from that. And I would also say, sort of not taking the appropriate amount of risk. We know from some of the research we've done and others have done that women tend to be more risk-adverse when it comes to investing, so are we too conservative for things that should maybe be a little bit more aggressive?
And then, flip side of that, "Gee, now I'm playing catch-up because I was too conservative early on. Now I'm taking on more risk than I should." So it's really that, I think, part of the plan is having that risk conversation with yourself. "Am I being too conservative for something that's got a 20-, 30-year time horizon, or am I being too aggressive for something that is 5 years away.
Karin Risi: Yeah, I think that's a great one, even more applicable to women than the ones I mentioned.
Rebecca Katz: Sarah, do you have one?
Sarah Hammer: I'm going to introduce another word which is "rebalancing"—and I think that's something that sometimes investors forget about. When you make your plan, which is so great, you might have an allocation of stocks to bonds. So suppose you have 60% of your money in stocks and 40% in bonds, but then over time markets move, and you get busy, and maybe you're not checking the portfolio. And what can really help over time is to do what's called "rebalancing," which is just to check your portfolio regularly, and make sure that you still have the allocation that you set out to have. And if for some reason you have way more stocks than you intended to have, then going back to the original allocation that you had planned for.
And our research shows that over time that will improve your performance. And it's so important to do, but it's just one more thing to think about, so it can be a challenge.
Rebecca Katz: This is true. We have long lists. All right, our next question is from Anita in Chicago, who says, "I'm a young woman, and it's hard for me to prioritize savings." You know what, I think we've covered this one in a couple of other questions. So let's skip to the next one.
Megan from Hershey, right up the street. "Five years into a career, I'm unmarried, no kids, what's a good, maybe a little aggressive, target percentage for 401(k) deductions? How about off-the-top pay percentage to allocate for long-term savings? Is there a rule of thumb?"
So we've talked about our views on the 401(k) savings. Is there anything that she should be doing beyond that?
Karin Risi: I think this one is similar to ones we've talked about. I won't mention the 12% to 15% again of the 401(k) contributions. But, Megan, like a lot of early career accumulators, has the luxury of time and the power of compounding on her side. So she should be thinking about taking advantage of the match and putting away as much as she can in retirement savings. I think she's told us that she's unmarried, no kids, so she also has the luxury of not having many, or as many, competing expenses as she may later, or as many of us do. So that's an opportunity for her to make sure she has an emergency reserve, make sure that she's thinking about what she wants to save for. And I would say that's pretty much what she should be thinking about. We talked a lot about the retirement savings.
Rebecca Katz: Do we have a general rule of thumb on how much you should put away for an emergency fund?
Karin Risi: Six to 12 months is kind of the rule of thumb that we offer clients, and it depends so much on their personal risk tolerance, and their health situation, and what is the likelihood of unexpected events in their family or whoever they might be caring for. So 6 to 12 months is kind of a general, but I think it's depending on each person. I don't know if you'd agree.
Catherine Gordon: Yep.
Sarah Hammer: Absolutely.
Rebecca Katz: Our next question is also from someone's who's single but a recently divorced single mom named, Sue, who says, "Where should I invest the most—my retirement, my child's college, or real estate?" And I think we frequently hear that you can always borrow for some of these other things, but you can't borrow for your retirement. I don't know if you tend to agree with that.
Sarah Hammer: Right. Yeah, that's a common question. It's another one of those questions about multiple goals and competing goals. And, again, what we tell clients is it's possible to address multiple goals with prioritization and planning. And as you mentioned, Rebecca, saving for retirement is so important. So if you are close to retirement—and when we say close, we mean 20 years or less until retirement—and you are falling short of your retirement savings goals, then you really have to get focused on that because, as you mentioned, there are no loans for retirement. There are no scholarships for retirement, not in your old age. So really focusing on that.
And, in addition, as Catherine and Karin mentioned, when you put money into your retirement plan, you may get the benefit of an employer match. You get the benefit of tax deferral. You get the benefit of compounding over time as we've talked about. So if you start now and do that and meet that retirement goal, it goes a long way towards meeting your multiple objectives.
Rebecca Katz: Great.
Karin Risi: Can I add just one thing on that because I think it's hard not to acknowledge. This comes up with clients so often as well, clients where we advise their portfolios. And it is so easy to say prioritize retirement over your child's education.
In reality, when we talk to clients, and practically speaking, clients have a very tough time doing that. Not all clients, but the emotional pull of wanting to save for your child's education can be really tough to rationalize intellectually the prioritization that Sarah just described. And she's absolutely right, but I just want to acknowledge for people listening that say, "I'm not sure I could do that," they're not alone.
The other thing that Sarah mentioned was, if you find you're falling short of your retirement goal, then you would want to make sure that you prioritize retirement savings. I think, in practice, many people don't know if they're falling short of their retirement goal.
First you have to have a plan and understand how much are you really trying to save for retirement? People don't know what their "number" is. A colleague of ours had done a great blog post around, "What's my number?" And the central focus of that was you first have to have a plan to understand, are you trying to save $1 million, $2 million, what's reasonable? What's going to fit with your lifestyle and your constraints and your time horizon? Once you know what you're saving for—for retirement, in particular, it tends to be the largest goal for most people— then you can figure out if you're falling short. Then the prioritization of goals becomes real. Without that, you're kind of just blindly hoping to put as much as you can here and here and here, and it's hard to advance on all fronts.
Rebecca Katz: To go back to your point about putting money away for college and how hard that is, one of the ways I rationalize it is, I don't want my daughter to have to take care of me in my old age, so my thinking is even if she had to find some other way to fund college, it would be better than her taking care of me when I'm 80.
Karin Risi: That's a fair point, too.
Rebecca Katz: She'll appreciate it someday. We have another Twitter question and maybe, Catherine, this one back to you. This is from "bring1011." "If my work does not match contributions to a 401(k), what's the best other option, especially if I'm leaving this job in two years?" So it's good you didn't use your real name. Any other options outside of a 401(k)? And we actually got a similar question in about saving in a Roth account, so maybe that's one of the options you could discuss.
Catherine Gordon: Yeah, I would say, the employer plan still makes sense if we're planning on staying because typically the employer can negotiate for lower-cost investments, or have a nice, typically a broadly diversified suite of funds to choose from. But if they do decide to leave the company and go someplace else, an IRA is a great savings option, particularly for people whose income allows them to take the deduction for the IRA contribution and even within the IRA, plenty of investment options. Again, paying attention to looking for something that offers broad diversification, reasonable costs. So IRAs are a terrific alternative to a corporate savings plan, especially one that doesn't have a match because ultimately it's the same goal—putting something away for retirement.
Rebecca Katz: What about this idea of a Roth? The last webcast we did was all about Roth IRAs, and you might have to just give a quick definition of what that is. I don't know, I can open up that with Sarah, if you want to.
Sarah Hammer: The basic difference between a Roth and a traditional IRA is that when you put money into a Roth, you pay tax on the way in. So you don't pay tax when you take the money out later. And this can be advantageous in different situations. But if tax rates go up over time, then it would be an advantage because when you go to take the money out later when tax rates are higher, you've already paid your tax.
And with a traditional IRA, you pay the tax when you take the money out, but you don't pay the tax on the way in. In fact, you get the tax benefit that Catherine mentioned in the form of an income tax deduction.
So there's different advantages to each one. We encourage our clients to learn as much as they can about both options. Each will be advantageous in different situations.
Rebecca Katz: And there's some excepts of a webcast all about it on our website, so when you're done with this one, you can watch that one.
Sarah Hammer: That's right.
Rebecca Katz: What better to do on a Thursday night? So let's take our next question. This is from Joan in White Plains, New York.Thanks for the question, Joan. And she says, "What should the investment pie chart of an 82-year-old widow look like?" So, Karin, you have Advice Services. What do you think? And, of course, we're going to speak in generalities.
Karin Risi: We are going to speak in generalities, I promise. The one thing that I first like about Joan's question is that in asking about a pie chart, I'll infer from that that she's speaking about asset allocation. And I like that she's asking with a top-down approach. We know that asset allocation is the primary determinant of your investment outcomes, so I like that the question isn't which stock should I buy, which fund should I buy, but what should my overall asset allocation be?
And we've talked a lot about goals and risk tolerance and time horizon. We don't know a lot about Joan. The one thing we do know is her age. And so, at 82, I'll presume she's a retiree. We don't know what her health status is. That's an important determinant of how risk-averse or how much she might need in emergency reserve, etc. But I think a good starting point for the conversation, Rebecca, would be Vanguard's Target Retirement Funds. So perhaps not appropriate for Joan or every investor, but on average, for an 82-year-old investor, we have a series of target-date funds. Sarah already talked about them. They have that glide path that we referred to earlier that gets increasingly conservative over time.
And sort of the last in the series of the target-date funds is our Target Retirement Income Fund. So for retirees, presumably, anybody let's say over the age of 72—so we're using age as a proxy, here—and so Joan would certainly fit into that. The asset allocation would be 30% stocks and 70% bonds. So it's perhaps a starting point or a jumping-off point for the conversation.
I think one point I'd make about that is some people listening may be surprised that Vanguard would suggest that you maintain a fair percentage in equities over time. Even for an 82-year-old, we would still say you need to ward against shortfall risk, making sure that you don't outlive your assets. And Joan already has lived to 82, and so she may live another ten years or longer, and so we wouldn't recommend that she take down equities entirely.
Rebecca Katz: Great. We are quickly running out of time, I should say. So we'll try to get through a few more questions. Our next one is from Mary in Mahwah, New Jersey, who says, "What should I do when my husband is no longer able to handle his accounts?" So this goes back to that early question about the spouse whose wife didn't want to get involved. Here is someone who, unfortunately, has to. Sarah, do you have any recommendations around this?
Sarah Hammer: Sure. This is another challenging question and yet a common question. It sounds like Mary's in a situation where's she's thinking about having to take over or be very involved with her husband's accounts, and that can actually be a similar situation if you're dealing with aging parents.
One thing that I would say that's extremely positive about her sending in the question is that it sounds like she's asking the question while he can still give her the information. And that is so critical. So she's taken the right first step, which is to ask what she should do.
And in that case, the first thing would be just to find out what your husband has. Find out what accounts he has. Find out what the account numbers are. Find out what the passwords are. If your husband has an advisor, find out who the advisor is, how can you contact the advisor. Get to know that person. Have that person get to know you. Those are kind of the first steps just to understand what does the picture look like.
And then the second thing, which is another, can be a challenge if you're getting to know what the different accounts are, is to learn how to read the statements because depending on where those investments are, reading statements can be a challenge. Catherine talked about looking for the expense ratio on the statements. But there are a lot of other parts of a statement that you'll want to try to understand when you're trying to figure out what's going on with the different holdings.
Another thing that's really important would be that she should fill out and send in what's called an Agent Authorization form. And this can be found on vanguard.com, and all it is is a document that allows you to access the accounts and to make transactions, and that will give her the power to make choices about those accounts, and it's so critical.
I guess the last thing would be, outside of the accounts and the holdings and understanding what her husband has, if she's in a situation where potentially her husband has a medical situation, just thinking about insurance and kind of what the big picture is—medical insurance, life insurance—you know, those are part of the whole picture of the financial life and definitely something to think about as well.
Rebecca Katz: Great. Iris from Mesa, Arizona, asks a question that kind of goes back to what we were talking about earlier. Catherine, you were talking about women being, generally speaking, more conservative sometimes than they should be in their portfolio allocations. But Iris says, "Do women trade as frequently as men, and are their returns in line?" And I've heard that women trade less, but maybe you can shed some light on that.
Catherine Gordon: So I love this question because it let's us talk about research—we're all about research. So there have been many studies that have been done on exactly this topic, but probably one of the most well-known is one that was done a number of years ago by a couple of professors from the University of California, Terry Odean and Brad Barber, who looked at '91 through '97 trading patterns and returns of men and women and concluded that men, in fact, for this study, traded 45% more frequently than women. And when we looked at the returns, the trading reduced the man's—the men in the study—return by 2.6%, and it reduced a woman's return by 1.7%, so almost 1%, which in investment terms is huge. Not trading as much didn't cost the women in the study as much in the way of returns. So, yes, to answer Iris's question, yes, men trade more frequently, and at least for this study, it shows it does have a more negative impact on returns.
And interesting that the study started from the presumption that why would people trade more, why would men trade more? It's an overconfidence in the ability to pick that stock, time that market. So that was sort of the hypothesis going into the study, that men would seem more overconfident, and therefore that would result in more trading.
So our next question is from Twitter, and I love this one. This is from M. Lisberns who says, "What is the best financial decision a woman should make once she gets married?" And, boy, there are so many questions I wished I had asked once I got married.
Karin Risi: Can I take that one?
Rebecca Katz: Go for that.
Karin Risi: So I had written a blog post on vanguard.com, last year, and it's called, "I love you, now let's talk money." And there was a lot of response to it all across the spectrum. And I think the best thing that you can do—and it sounds simple, but you'd be amazed at how many people don't do it and some of the comments in the post indicated that—is before getting married, preferably, have that open dialogue. Have the sit-down discussion to say, yes, how much money do you make? How much money do I make? What do you have saved? What do I have saved? What are our shared financial goals? Is it more important to us to save for a house? Do we want to relocate? Do we want to relocate abroad? If something happens to one of us, how will we handle a medical crisis, or a financial crisis of any kind, if one of us gets laid off?
You know, there has to be an implicit understanding—or an explicit understanding, I'll say—through communication and, I mean, it sounds ridiculously simple, but it's amazing—and there's actually research that would show many, I think it's in the blog post—there's some high percentage of married couples who did not have anything approaching a financial conversation before getting married. And it can obviously lead to some downside surprise after the fact. You find your goals aren't aligned, etc.
Catherine Gordon: And I would just add that my advice would be: Don't cede knowledge of your family's financial situation. If one of the partners is more apt to manage the finances, whether it's investments or paying the bills, okay, that's great. Don't wake up five years from now, and say I really sort of stepped away from that.
Karin Risi: Or 20 years from now, that's worse.
Catherine Gordon: Or 20 years from now because it was easy. Because he liked it, she liked it, and I had other things. So I would say stay close to sort of knowing your financial situation so that you're not waking up 20 years from now, "Where are the accounts? Where is this being invested?"
Rebecca Katz: I think we have time for one or two more questions. Let's take a look further down the list. Here's a good one. This one's from Barbara from Springfield, Missouri, who says, "Please cover the topic of starting over after being widowed."
In this case, her husband did all the financial planning, and she doesn't know where to begin learning about that side of her life now as a single woman, and it's very overwhelming. So, sorry for your loss. We talked about some of the things that she can do, but is there anything specific to someone who is maybe—we don't know her age—but older, the middle of her life, and widowed.
Karin Risi: Yeah, again, this is, unfortunately, a common occurrence with clients that we work with. And so common, in fact, that we do have resources on vanguard.com. I believe if you type in "loss of a loved one" in our search bar, resources will come up. I couldn't possibly come up with a laundry list here, but it is an incredibly emotionally challenging time, and I think perhaps making it more manageable for the widow in this sense, is separating what needs to be done right away from what can wait.
So perhaps she's the executor of the estate, but whoever is the executor needs to meet with an estate attorney. That's probably job one, to sort of separate and identify—hopefully that financial inventory that I talked about earlier was done, and there was some communication, and the person knows where the financial inventory is, and everything, all of those birth certificate, copies of the death certificate, bank account statements, insurance policies, the most current will—hopefully it's a current will. Those are the things that you would bring to that meeting. And that's probably the first order of business.
There are obviously things to do like canceling subscriptions and all of that sort of stuff, but that can wait. So kind of separating out and making it more manageable. Perhaps it is an opportunity to think about who can you enlist for support. If you don't have a close friend or family member who is adept at financial matters, you can consider hiring a financial advisor. Ideally, you'd like to have a relationship with a financial advisor in advance, but life happens, and when something like this happens, it's an opportunity to reevaluate how you want to approach financial matters. And if you were in a position where you didn't do it for 20 years, then it might be an opportunity to enlist the support of a professional.
Sarah Hammer: What Karin said about enlisting the support of a professional in light of insurance actually can really work well together in this unfortunate situation. When she goes and looks through insurance, there are going to be so many different kinds. There might be health insurance to deal with, there might be life insurance, there might be employer insurance. And insurance can be very confusing for so many people, so having an advisor to help you with that can help a lot.
Rebecca Katz: Okay. Well we have a ton of questions left, and I actually want to just make sure that if there's something that you particularly think the audience should know, that we can leave them with a final thought from each of you. So rather than take some more of the specific questions, I would just ask, as you think about the audience, you think about women managing their finances either from an unfortunate situation or just getting started, kind of what's the one piece of wisdom that you really want to share with them tonight?
So Sarah, if you want to start.
Sarah Hammer: I think if I were going to share one thing, it would be that education can be a really powerful tool, and there are a lot of resources available here at Vanguard to help you, to help our clients. If you have questions, there are so many questions, and all of us have aspects of investing and saving and planning that are intimidating for us. So knowing where to go with those questions can help a lot. So educating, reaching out, getting the help that you need, we are here to help. I think that would be the one thing.
Catherine Gordon: Yeah, I'd actually like to put tonight's webcast in a time capsule and come back ten years from now and see if the questions change, because I'm actually very encouraged by the trends we're seeing among women wanting to be educated, wanting to be knowledgeable. Women coming into a marriage or a partnership having earned a salary, that have their own financial assets, feeling more confident. So I think looking forward ten years from now we're going to be in a place where women are more confident, and I would just encourage. I think that's just the trend we're seeing in the general population, so I don't know if that's necessarily wisdom, but words of encouragement.
Karin Risi: I couldn't agree more with Catherine, and I hope that's the case that education will steadily increase. But for the viewers of tonight's webcast, there was a large percentage of them that didn't feel confident; and for those viewers, I would say, again, a word of encouragement but the wisdom is really around make it a priority. So it's your job. There's a few things in life that are really important. This may not be the top one or two, but it's among the most important things you can do, not just for yourself but for your family and your loved ones. So figuring out what your goals are, prioritizing those goals, getting a plan, and having the discipline to stick with that plan. And if you are a shared decision-maker in a relationship, engaging that other person, whether you're the primary decision-maker or vice versa, resolving to engage that other person into it.
Rebecca Katz: Now Sarah mentioned—and you run Advice Services—obviously, that we're here to help, but what forms does that help take? If people, obviously they can start with vanguard.com, but what else might they look for?
Karin Risi: Yeah, I mean we have a continuum of help and guidance for investors ranging from online tools on our website, and we mentioned the financial inventory, we mentioned the loss of a loved one. There are many things on our website that you can look at. There are tools and calculators for those that are inclined. Generally women are less inclined for tools and calculators, but they're there on vanguard.com should someone want them.
Rebecca Katz: But now we need to know our number.
Karin Risi: That's right. And then certainly we have actually thousands of investment associates that serve our clients, and they can help with a lot of these questions. And then for those clients that want additional help and guidance, we do have the Advice Services groups; and we have ongoing relationships with clients where we manage the assets for people. And that's where some of these life events, it's really helpful to have that objective third party that the relationship is established. There's an investment policy statement. The goals are set out. The prioritization is clear. Your progress toward goal is clear. There's very little guesswork. It's not perfect, but it can help.
Rebecca Katz: Great. Well thank you three for all of the good suggestions and recommendations. This was a lot of fun, and I hope we get to do another one of these because we have a lot of questions, a lot of Twitter questions. Of course, a lot of people want to know whether they should buy the Twitter IPO, but we won't answer that. We'll save that for another time.
So thanks for being here, and from all of us here at Vanguard, thanks to all of you for the great engagement and questions. It really was a lot of fun. In a few weeks, we'll send out an email that will have highlights from this broadcast and a transcript for your reading convenience. And if you think you heard something here that would be useful to another woman you know or someone you care about, go ahead and forward that e-mail on and share it with them. We'd love to spread the wealth here.
On the right side of your screen you should see a survey. We'd like to know what you thought of tonight's webcast, if you have ideas for others, or if you want to see another one with the four of us, that would be great. If you have trouble seeing the survey, check and see if your browser zoom setting is set to 100%.
So, again, from all of us here, thanks for sharing a bit of your evening with us, and we hope to see you again next time.
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