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Best Advice for Women Starting to Invest and Save for Retirement

Everyone needs to be financially literate and plan for retirement, but for women, there can be challenges to overcome.

If you’re a young woman and you’ve recently entered the workforce or plan to, you might be wondering what to do with your paycheck.

Well, experts generally agree that you have only two tasks: First, learn as much as possible about money, including your employee benefits, and two, start saving for retirement.

Become Financially Literate

Katrina Sherrerd, CEO at Research Affiliates, recommends learning about the basics of finance and investing, as well as the ways that investors create barriers to achieving their goals. “There are many sources of basic information, including books, articles and many asset manager websites,” she says.

Why is this so important?

Well, women are less likely to own stocks -- and face other financial challenges -- due to lack of confidence as well as lack of knowledge, according to new research that analyzed the financial literacy gender gap.

The paper, Fearless Woman: Financial Literacy and Stock Market Participation, found that women tend to disproportionately choose “do not know” when answering financial literacy questions. However, when the “do not know” option is removed, women choose the correct answer more frequently, indicating a gap in confidence, not simply knowledge. “Both knowledge and confidence affect women’s stock market participation,” wrote the authors of the paper.

Using the “big three” financial literacy questions (see below), which measure knowledge about interest compounding, inflation, and risk diversification, the paper finds that about two-thirds of the financial literacy gender gap is explained by lower financial knowledge and one-third is due to lower confidence.

Among the paper’s key findings and implications:

  • In building personal wealth, both financial literacy and confidence matter. They both influence women’s participation in the stock market.
  • When it comes to gender, disparities in confidence can translate into large differences in financial behavior and the accumulation of wealth.
  • “Although women have lower financial literacy than men, they know more than they think they know,” Annamaria Lusardi, the founder and academic director of Global Financial Literacy Excellence Center at George Washington University School of Business and co-author of the paper, said in a statement. “It’s crucial for women to have confidence in their knowledge because more than ever, women need to take charge of their financial lives. Let’s send a clear message and have a Fearless Girl statue in front of every stock exchange around the world!”

Save, Save, Save

Besides learning about money, you’ll have to start saving it, say experts.

“Once basic needs are taken care of, try to save 10% of income each year through a tax-preferred savings account such as employer plan or IRA,” said Vickie Bajtelsmit, a professor of finance at Colorado State University.

Sheryl O'Connor, the CEO and founder of IncomeConductor, also recommends putting a retirement savings plan in place and sticking to it. “No matter how small an amount you save and invest, starting early and consistently saving is the key,” she said. “If you have access to a defined contribution plan, max out your contributions or at least contribute enough to get the company match.”

O’Connor also recommends investigating whether your employer offers a Roth 401(k). “Many people only contribute to their traditional 401(k), thinking that the tax deferral is the best choice. “When they hit retirement with only tax-deferred savings it presents a number of issues, including being forced to take RMDs over their required income level which may result in pushing them into an income related monthly adjustment or IRMAA bracket. Diversifying their savings strategy across tax-deferred, taxed-now and non-qualified savings is the smartest strategy.”

And if you don't have access to a plan, and over 60% of U.S. female workers don't, O’Connor recommends setting up a traditional IRA or Roth IRA and set up automatic contributions into that account. “Anything you can save above that, set up a brokerage account with automatic contributions as well," she says.

In addition, Barbara Roper, director of investor protection at the Consumer Federation of America, recommends adopting an appropriate asset allocation plan based on your time horizon and other risk factors, keeping costs low, and ignoring the noise. “And when you need advice, look for someone who minimizes conflicts of interest in their business model and operates under a high fiduciary standard of conduct,” she said.

Others agree but also suggest that you establish goals and gamify your savings plan.

Contribute to a 401(k) type account as soon as you get a job, said Inga Timmerman, an associate professor at California State University, Northridge. “Start slowly and increase it every few months until you max it out,” she said. “If your work is offering a match, start with as much as you can to get the full match. If not, consider going to a Roth IRA until you max it out.

In the end, if you can max out your 401(k) year after year from the time you are around 30 until retirement, you will be just fine when you retire, said Timmerman. “I know it's hard, so make a game out of it. Challenge yourself to see if you can push a little higher every month. It is worth it.”

The Big Three

The Interest question: Suppose you had €100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

  1. More than €102*
  2. Exactly €102
  3. Less than €102
  4. Do not know
  5. Refuse to answer

Inflation question: Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

  1. More than today
  2. Exactly the same
  3. Less than today*
  4. Do not know
  5. Refuse to answer

Risk question: Please tell me whether this statement is true or false. “Buying a single company’s stock usually provides a safer return than a stock mutual fund.”

  1. True
  2. False*
  3. Do not know
  4. Refuse to answer

(*) indicates the correct answer.