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Investing for the future

Given that women earn approximately 30% less than men in annual earnings it is surprising to learn how few women are prepared for retirement. Deep down do you believe that a white knight will ride in at the last moment and save you from financial disaster? Now is the time to explore your beliefs and start immediately to prepare for a financially secure future.

What the statistics show
It would seem as if women do not have the same training and expectations as men when it comes to money. Do women have a "fairy tale" relationship with money? Deep down do we believe that a white knight will ride in at the last moment and save us from financial disaster? Sadly, according to numerous statistics, this would appear to be so.

  • Older women's income from all sources at retirement is 70 percent less than men's.
  • 80 percent of all widows in poverty become poor only after their husbands die.
  • Divorced older women have a higher poverty rate than widows of the same age.
  • Only 14 percent of white, 10 percent of black, and 8 percent of Hispanic older women received pensions in 1994.
  • The average annual private pension for retired women is $3000 compared to $7800 for men.
  • In 1995, the average woman earned 71 percent of the wages a man received for the same work, and between ages 55 and 64 that drops to 65 percent.
  • Minority women have the highest wage gap. Black women earn 64 cents of the dollar a white man earns, Hispanic women earn 53 percent and white women earn 71 cents.

Source: University of California's Institute for Health & Aging

That is not all. Women save later and we save less money. We also tend to invest later and invest less. According to a survey conducted by Merill Lynch, only 26% of female baby boomers are saving for retirement versus 43% of males in the same age category. Those women who do save manage to put away 40% to 50% less in retirement and investment accounts. Other alarming statistics show that while women on average earn 26% less than male workers for doing the same job, we are less likely to have a pension plan, and we typically spend 12 years away from the work force to raise children, take care of aging parents, etc. So, not only are we earning less money, we have less time in which to earn it.

Emotional investment
Women are typically good with household budgeting because it is something that we deal with everyday. The stock market, on the other hand, is a whole different world. Women tend to shy away from the stock market because they think it is too risky. According to experts, women feel more comfortable putting their money in "safe", low-risk, fixed investments like IRA's, 401-K's, money market mutual funds, and CD's, which are all vulnerable to the eroding effects of inflation. However, a degree of risk is necessary in order for our money to grow. What to do? We need to bite the bullet and learn how to invest our money more aggressively, specifically in the stock market.

The good news is that women are joining investment clubs and these female investment clubs are outperforming male investment clubs. Why? Because women have a lower risk tolerance, we are more likely to engage in greater research and planning of our investments. According to Salomon Smith Barney, a leading investment firm, women investors deal with risk by studying the company profiles of market leaders in areas that they can relate to in their everyday life, education and women's health, for example. In other words, women tend to get emotionally involved, making it more meaningful, and are thus making sense of the stock market.

Most families have three major financial goals: setting aside an emergency fund equal to three month's living expenses, saving money for their children's college education, and putting money into a retirement plan.

Savings
The keywords here are safety and liquidity. This is your cash portfolio and you want this money to be available to you sooner rather than later. Besides the traditional savings account, other good saving vehicles (which earn a higher interest rate than a savings account) include:

Series EE Savings Bond - a 30-year security that accrues interest until it is cashed or reaches final maturity. The purchase price of the Series EE is half the denomination or face value and denominations range from $50 to $10,000. However, you are limited to buying $30,000 (face value) of this type of bond per person per year.

Money Market Account - a highly liquid account offered by banks or brokerages that requires a minimum deposit of $1000, a minimum monthly balance, and limits withdrawals. Money market accounts are not investments per se.

Money Market Mutual Fund - a fund purchased directly through mutual fund families or through a mutual fund "supermarket". Each fund sets its own minimum investment amount but are typically higher than $2500. A money market mutual fund may or may not offer check-writing privileges.

Certificate of Deposit (CD) - issued by commercial banks and savings and loans this is a savings certificate that entitles you to receive interest. CD's are available with maturity ranging from one month to two years.

Treasury Bill - Short-term debt security issued by the federal government for periods of one year or less.

College education
According to The College Board, given a rate of 5% tuition inflation over the next 18 years, parents of a child born this year can expect to pay $150,000 for 4-year education at a private college and approximately $145,000 for a 4-year education at a public school. Clearly, the time to start saving for your child's education is now. The best way is to invest a fixed amount on a regular schedule and to stick with it.

Stock Mutual Fund - choose no-load mutual funds and spread your risk over dozens of stocks.

Education IRA - an IRA with a maximum contribution of $500 per child per year until the child reaches 18. Contributions to an education IRA are not tax-deductible but investment earnings can be withdrawn tax-free as long as the money is used to pay for college costs.

Retirement options
Experts say to maximize your contributions to employer-sponsored retirement plans but only to the highest amount allowable. You don't want to overextend yourself by going over this amount. Haven't got much put away towards retirement? Start now!

401K - a voluntary retirement plan offered to employees that allows a certain percentage of their pretax pay to be set aside and invested in a retirement plan. The employer can also contribute or "match" employee contributions. This money is not taxable until funds are withdrawn.

Individual Retirement Account (IRA) - A retirement account set up at a bank, credit union, brokerage firm, insurance company or mutual fund company that allows a yearly contribution, not to exceed $42,000 for the individual working person.

Roth IRA - an IRA that allows you to put up to $2000 a year away non-tax deductible with the benefit of being able to withdraw the earnings tax-free in the future.

Keogh - A retirement plan used by self-employed individuals who are not incorporated. You are allowed to make a tax-deductible contribution up to a certain percentage of your income.

The bottom line: It's your money
Always do your homework.
Never be afraid to ask questions.
Trust your instincts.

Note: The information in this column is provided for educational purposes only. Please consult a financial planner or financial advisor when developing a financial strategy.

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