Women tend to live longer and make less than men. That's an issue through their working lives as they save for goals like a house and financing an education, and then it gets even more troublesome for many as they age into their retirement years.
According to the U.S. Department of Labor, women working year-round are paid only 83.7% of what men are paid, and the disparity is even larger for Black and Hispanic women. It also exists at every education level.
Further, the U.S. Census Bureau says that 50% of all women ages 50 to 66 have no personal retirement savings, and only 22% have $100,000 or more put away. For men in that age bracket, it's 47% with no savings at all and 30% with more than $100,000.
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The reasons are societal. There's the gender gap in pay, of course, combined with family obligations that come with bearing the brunt of caregiving responsibilities for the young and old. Together they can easily impact earning potential and the ability to accumulate the wealth needed to help secure a comfortable retirement and meet the obligations that come before that, like buying a house or financing an education.
But by understanding how to invest wisely and consistently, women -- and everyone else -- can make their money work as hard as them through their earnings years and pave the way to a more secure post-working life.
Making your money work harder while you are, too
That begins with investing in the stock market. The easiest way to do that may well be investing in one of the many index funds that track the greater market. A great example is the Vanguard S&P 500 ETF (NYSEMKT: VOO). This fund or others like it are generally available as one of the choices in your company's 401(k) plan, if you have one of those, or on your own through myriad investment firms.
This exchange-traded fund mirrors the performance of 500 of America's largest publicly traded companies, doing that by owning a weighted number of shares of each. That's what index funds like this do. They make it easy to invest wisely without having to buy and sell the stocks yourself.
What they also do is vastly outperform simply stashing cash in a savings account or even higher-earning certificates of deposit or money market accounts.
By how much? Let's begin with an initial investment of $100 in the S&P 500 and add $100 a month and leave it alone. And let's say you did that starting in 2005. In 18 years, you'd have about $54,000. With a savings account, make that more like about $23,000. That's assuming a conservative 9% total return each year for the stock market fund and 1% for the savings account.
The market can help you beat inflation
Both of the above results are based on total return -- leaving the money alone to grow through the magic of compounding and automatic reinvesting. Certainly, you can do a little better by putting the money into certificates of deposit instead of simple savings, but not that much.
History shows that the stock market tends to return an average of 7% to 10% annually over time. That beats inflation. Your savings accounts and CDs don't. The chart below is a graphic illustration of that, showing how slowly CD rates have risen since inflation took off last year about this time, as well as how the stock market has responded, first falling and now recovering from the effects of rising interest rates on investor sentiment.
US 1-Year CD Rate data by YCharts
The biggest risk can be an aversion to risk
There's a growing body of research that indicates women may be more risk averse, or at least risk-aware, than men when it comes to investing and, frankly, lots of other behaviors. The problem with that attitude, however, is that because ultra-safe savings accounts produce so little versus even ultra-safe investing, it might actually be riskier.
That's why I chose 18 years as the time span for the example above. That's the typical span from a kid arriving to that kid going off on their own, whether to college or work or the military. Those are the years when child-rearing presumably has its biggest effect on the gender gap when it comes to earning and being able to save and invest.
There are no guarantees of performance, but keep in mind that history is on your side if you choose to grow your nest egg in the stock market. And you don't need a lot to start. Got $500? That's enough to begin the journey. It's not a race but a journey, and whether you're doing this solo or with a partner, if you have the discipline to put money away and leave it there, that could be the best way to close the gap slowly but surely between where you are now and where you want to be.
