MONEY Rollovers

Why Wall Street Is Wooing Women and Their Future Wealth

Businesswomen in a black car
Riccardo Savi—Getty Images

Women will receive 70% of inherited wealth over the next two generations, and Wall Street wants their business. Here's what you—and the advisers wooing you—need to know.

Is there a target on the back of my dress? Because it feels like there is a target on the back of my dress.

It was painted there by the financial services industry, which has grown hyper-aware of the fact that women have a lot of money and are about to have a lot more.

According to a 2009 study from the Boston College’s Center on Wealth and Philanthropy, women will inherit 70% of the money that gets passed down over the next two generations, and that excludes the increasing amounts they earn on their own. Women already own more than half of the investable assets in the United States.

Companies like Bank of America’s Merrill Lynch, Prudential Financial, and TD Ameritrade are studying the investing behavior of women, in the hopes of winning more of our dollars.

They know that when a husband dies, his widow often switches money managers.

Indeed, the Certified Financial Planning Board of Standards is trying to lure more women to the business of financial advice.

Sallie Krawcheck, who ran Merrill at Bank of America, recently bought a women’s network and started a mutual fund that seeks to invest in companies led or heavily influenced by women.

Last week, Barclay’s Bank moved in the same direction, creating a Women in Leadership index and related investments.

It’s great to be wooed, but it’s also scary to be the focus of a great marketing effort. It could all end badly if the industry simply pink-washes inferior financial products.

Here are a few bits of advice for women and Wall Street, as they circle each other warily:

Questions

There will be questions. Women are infamous in some financial advisory circles because we ask so many more questions than men. That is good. Do not invest in something you don’t understand. Advisers who want us to invest in complex products and services need to be willing to explain them clearly and simply.

Female Advisers Not Necessary

We don’t need our advisers to be women. It’s not like going to a gynecologist. A male financial adviser is fine with me, as long as he’s competent, straightforward and good with my money.

We also don’t need pink folders for our statements or ladies’ investment products. We like green, and want the products and services that will secure our money and make it grow.

Funds that invest in women-led companies may do well in the future; there’s some research that diverse boards govern winning companies. But women and men should be cautioned not to be over-dependent on niche funds and not to overpay for them.

Keep Costs Low

Women control most household income and tend to be price and budget conscious. So don’t try to win us with high-priced mutual funds when there are less expensive ones that do the job.

Don’t charge us a lot to recommend a generic plain-vanilla index fund portfolio we could find on our own.

Women, Worry Less

Survey after survey reveal that women are more afraid of managing money than men (which is not the same thing as being worse at it) and they are more afraid of market risks than are men.

Women keep a lower proportion of their money in stocks than men do, even though women live longer and the stock market has long proven itself to be the best place for long-term investors to keep money.

Advisers, Worry More

A good adviser won’t prey on those fears; she or he will help female clients overcome their worries and invest in low-cost products that balance risks and rewards.

And if they don’t? There’s another new company out there that is explicitly targeting women investors. It’s called FireMyAdvisor.com.

MONEY 401(k)s

The New 401(k) Income Option That Kicks In When You’re Old

The U.S. Treasury allows savers to buy deferred annuities in their retirement plans. But no need to rush in now.

The U.S. Treasury Department has just given a tax break and its blessings to retirement savers who want to buy long-term deferred annuities in their 401(k) and individual retirement accounts.

The new rule focuses on a particular kind of annuity. These so-called deferred “longevity” plans kick in with guaranteed income when the buyer turns, say, 80 or 85 years old. For example, a 60-year-old man who spent $50,000 on a longevity annuity from New York Life could lock in $17,614 in annual benefits when he turned 80, the company said.

Like most insurance policies and traditional pension plans, these “longevity” plans take advantage of the pooling of many lives. Not everyone will live beyond 80 or 85, so those who do so can collect more income than they would have been able to produce on their own.

That takes the worry of outliving your money off the table. It also lets you take bigger retirement withdrawals in the years between 60 and 80. A saver who put 10% of her nest egg into one of these policies could withdraw as much as 6% of her retirement account in the first year instead of the safer and more traditional amount of 4 percent, estimates Christopher Van Slyke, an Austin, Texas, financial adviser.

A fee-only planner who tends to view many insurance products with some skepticism, Van Slyke likes these longevity plans for those reasons and because they convey a tax break, too: IRA and 401(k) money spent on these policies—up to 25% of the account’s value or $125,000, whichever is less—is exempt from the required minimum distribution rules that force savers over 70 1/2 to make withdrawals that count as taxable income.

The insurance industry loves this new rule, too, so consumers can be excused for taking some time to consider all the costs and angles. Treasury official J. Mark Iwry announced the new rule—declared effective immediately— at an annuities industry conference on Tuesday, and it was a crowd pleaser.

Related: Where are you on the Road to Wealth?

For retirement savers, the math just got harder. Should you buy such a plan? If so, when and how? What should you look for? Here are some considerations.

* You don’t have to rush. The younger you are, the cheaper these annuities are. A 40-year-old male putting down that same $50,000 with New York Life would get $31,414 in monthly benefits—almost twice the payout of the 60-year-old. But there’s a downside to that: Most do not have built-in inflation protection, points out David Hultstrom, a Woodstock, Georgia, financial adviser. So if you’re buying a $1,200-a-month benefit now but not collecting it for 20 years, you’ll be disappointed with its buying power. At a moderate 3% annual inflation rate, in 20 years that $1,200 would cover what $664 buys now.

* There are other reasons to wait. These policies are relatively new, and the Treasury’s rule “will open the floodgates,” Van Slyke says. Expect heightened competition to improve the policies. Furthermore, annuity payouts are always calculated on the basis of current interest rates, which remain near historic lows. A policy bought in a few years, in a (presumably) higher interest-rate environment probably would provide higher levels of income.

* Age 70 might be a good time to jump for those with lots of assets. Those required taxable distributions start the year you turn 70 1/2, so if you’re worried about the tax hit of taking big mandatory distributions, you could pull some money out of the taxable equation by buying one of these policies with it. Your benefits would be taxable as income in the year you receive them.

* Social Security is the best annuity. Before you spend money to buy an annuity, use money you have to defer starting your Social Security benefits as long as possible. Your monthly benefit check will go up by roughly 8% a year for every year after 62 that you defer starting your benefits. Social Security benefits are inflation protected, unlike these annuities.

* Think of your heirs. Money spent to buy an annuity is gone, baby, gone, so you can’t leave it to your kids. Some of these annuities will offer “return of premium” provisions. That means that if you die before you’ve received your purchase price back in monthly checks, your heirs can get the rest back. But that will probably cost you something in the first place. New York Life, for example, shaves almost $4,000 a year of annual payout for the 60-year-old who wants to add that protection to his policy. The heirs would get only cash that has been falling in value for all the years you’ve held the policy, not any income on that cash.

* This won’t solve your long-term care problems. The more money you have tied up in an annuity when you need round-the-clock nursing care, the less you have available to pay for that care. So if you want to use a longevity annuity to give yourself some income in those later years, you should also assure you have the big bad expenses covered. That means setting aside enough other money to pay the $7,000 to $10,000 a month it can cost for full-time nursing care, or buying a long-term care insurance policy you have faith in and can afford.

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