March 10, 2023 | 11 Minute Read
Global Head of Strategic Advisory Solutions
Senior Market Strategist, Strategic Advisory Solutions
The number of women investors has surged. Over the past two years, women have become more engaged in their finances, motivated by the build-up of excess wealth following significant pandemic fiscal transfers, the shift to hybrid work that has freed up time to invest, and the need to grow earnings as economic conditions became ambiguous. As a result, financial platforms with low barriers to investing saw the fastest rise in new account openings at the turn of this decade. We think this momentum will continue, further pushing the envelope on the composition of investors towards a younger, more diverse, and more female audience.
Looking at the decade ahead, the Boston Consulting Group expects women’s wealth to grow $5 trillion globally every year.1 A similar growth trend may appear with women investors in western Europe too. According to a McKinsey study,2 European women’s assets may grow at 8.1% CAGR relative to the 2.7% estimated for men through 2030. On a cumulative basis, European women’s share of investments is forecasted to reach 45% of assets under management by 2030.
Source: Fidelity, Robinhood, eToro, and Goldman Sachs Asset Management. As of March 1, 2023. Data shows the growth in new investing accounts during the COVID-19 pandemic.
Even against challenging market dynamics in 2022, investors generally have continued to demonstrate discipline in funding their retirement savings accounts. Data on How America Saves, a study on Vanguard’s defined contribution retirement plan participants, showed that 1) 50% of participants have kept their savings plan unchanged from prior year, 2) 24% increased retirement deferral from an annual automatic increase, and 3) 15% increased retirement contributions.3 While all positive news, we believe that the current macro backdrop may still require women investors to develop a dynamic portfolio to address both their unique challenges and needs amid this decade of potentially modest economic growth, moderate public market returns, and a higher cost of living.
Today’s economic realities continue to cloud consumer sentiment on financial security. According to the National Association of Plan Advisors, roughly a third of advisors have seen their clients recalibrate expectations on retirement, citing inflation and recession as key factors driving their timeline.4
Our Retirement Survey & Insights Report has also identified inflation, a potential reduction in social security income, and meeting future healthcare needs as three top worries of investors today.
Elevated Inflation: The costs of many necessary expenses have outpaced the long-run trend of US CPI inflation, as shown in exhibit 2. We expect price pressures to persist at least through 2024 before normalizing to a historical trend level. In the meantime, these expenses may weigh on purchasing power and leave investors with less discretionary income to grow their savings.
Source: US Bureau of Labor Statistics. As of March 3, 2023. For illustrative purposes only. US CPI refers to the monthly Consumer Price Index. Chart shows the average monthly change in consumer prices for all US urban consumers from January 1990 to January 2023. Past performance does not guarantee future results, which may vary.
Reduction in US Social Security Income: The fate of social security also remains uncertain, though the program is unlikely to disappear. Without an injection of cash, dwindling funds may ultimately translate to a smaller payout for future US retirees.
Future Healthcare Needs: According to the US Department of Health and Human Services, nearly 70% of retirees will need some type of long-term care. The average person will require these services for at least three years and 20% of retirees will need support for five or more years.5 Long-term care insurance will become a critical financial tool. For women, longer life expectancy means higher insurance premiums.
While these concerns have affected both men and women, we believe the trifecta of challenges confronting women – lower earnings power, longer lifespan, and greater amount of time spent out of the workforce – may magnify the shortfall in their investment portfolios relative to men.
Lower Earnings Power: Women continue to earn 82 cents for every dollar earned by their male counterparts.6 And while women comprise 47% of the workforce, they earn 21% less in lifetime income relative to men.7 Consequently, women's lifetime retirement contributions on average fall 30% short of their male peers.8 The resulting impact is a pronounced pay and wealth gap, leaving women less financially prepared for the future.
Longer Lifespan: Differences in life expectancies between men and women may further amplify the retirement shortfall. Women tend to live three years longer than men, on average, which makes retirement savings longevity vital. Yet women are more likely than men to retire earlier than planned due to health reasons, family care needs, or job loss.9
Time out of the Workforce: Competing life priorities reflect key factors fueling additional retirement challenges. Women tend to work nine years less than men from taking on primary childcare responsibilities, leaving women with less savings. According to our study, two four-year periods out of the workforce can lower retirement savings by up to 35%.10
The starting point of earning less, living longer, and retiring earlier creates additional pressure on women to ensure that they have sufficient savings to endure these uncertainties. Importantly, as financial needs have grown commensurately with macro challenges, we believe that it is no longer enough to just afford today’s bills but also a necessity to get ahead of future ones too.
While there is a growing need and appetite for financial advice, women today remain financially underserved. A 2022 survey by Ellevest found that nearly 70% of US women have never met with a financial advisor compared to 41% of men.11 Moreover, women have routinely relied on the guidance of family members for financial advice. The share of older women with personal retirement savings has also lagged their male peers by ~3.5 percentage points and the gap grows based on marital status.12 Even across non-retirees with retirement savings, a higher share of men reported being comfortable managing their own investments relative to women.
Source: Federal Reserve and Goldman Sachs Asset Management, as of February 2, 2023.
Not only have we seen this confidence gap persist, but we also believe an investing gap will grow. While women are investing more, their account balances still lag that of men. A survey conducted by the FINRA Foundation and the University of Chicago in 2020 revealed that across new investors, 23% of women reported account balances below $500 versus just 15% of men. Male investors also frequently reported balances of $25,000 and over.13 These differences in account balances may become significant over time as contribution variances and portfolio compounding effects drive dispersion in cumulative savings.
On contributions, we think the way in which Americans engage the US labor force may also play a large part in impacting wealth outcomes today. Americans have moved from a traditional employment structure (one worker to one employer) to a “one worker to many employers” structure, ultimately driving the shift in responsibility of financial well-being from employers to employees. Accordingly, this structural shift has led Americans to explore a broader range of retirement savings accounts as evident by a growing footprint of assets held in personal accounts (52%) and IRAs (55%).14
Source: Federal Reserve and Goldman Sachs Asset Management, as of February 2, 2023.
This burden of financial security disproportionately impacts women over men. Our prior work on labor force participation detailed the greater share of women engaged in part-time employment. Private sector jobs data from ADP Research Institute have noted a similar trend, reinforcing the growth in the gig economy from 14.2% of the workforce in 2010 to 16.4% in 2019.15 Unlike traditional employment, women made up the majority (57%) of short-term W-2 employees while men were more heavily represented in 1099-MISC independent contract work (as shown in exhibit 5). The demographic profiles between groups are distinct, with contractors often older, more educated, and more likely to have higher incomes. Still, across both pools, access to health and retirement benefits varied widely. Most gig workers over the age of 55 did not have an employer-sponsored retirement plan. Meanwhile, only 37% of independent contractors and 28% of short-term employees had a self-funded retirement plan.16
Source: ADP Research and Goldman Sachs Asset Management. As of February 2020, latest available.
In our view, the inertia in the gig economy may further amplify the retirement financing gap and deepen the savings shortfall for women relative to men. For example, women’s concentration in W-2 gig work may keep them from participating in corporate 401K matching programs and accessing a pre-vetted list of sound investment vehicles.17 Consequently, a greater segment of women will need to either rely on social security benefits to fund retirement or to perform their own diligence on investment funds, which in our view is a difficult solo task.
Even as asset managers, we believe markets can be incredibly complex to navigate at times and selecting managers outside of a pre-vetted list may feel like looking for a needle in a haystack. Our analysis in exhibit 6 illustrates the wide historical dispersion of investment performance across US large cap equity funds. For example, a female investor deploying $100 in the market over the last 10 years would have realized a five-fold increase in her initial investment if she experienced the returns of a top quartile US large cap equity fund. However, her investment would have led to a significantly different outcome if she selected a bottom quartile fund, delivering less than a two-fold increase.
Source: Morningstar and Goldman Sachs Asset Management. Data uses returns of US equity funds that are categorized as US Large Cap Blend. Data reflects net monthly returns from January 2013 to December 2022. GROWTH OF $100: A graphical measurement of a portfolio's return that simulates the performance of an initial investment of $100 over the given time period.
We believe these risks may be exacerbated by asset allocation differences. Research on this topic remains quite mixed, with some studies touting a tendency for women to hoard cash18 while others have found a negligible difference between portfolio allocation across genders.19 Meanwhile, according to McKinsey, a noticeable gap appears between the average portfolio allocations of European women and men. The average female portfolio in Europe comprised 32% equities, 32% fixed income, with the remainder in cash.20 In comparison, the average male portfolio placed a greater emphasis on equities (45%) while holding less in fixed income (24%) and cash (31%). Still, we highlight the potential wealth implications of under-investing by extrapolating the above asset allocation decisions over a 10-year horizon. Our findings suggest that first, idle cash may impede accumulation goals most significantly for investors with little near-term liquidity needs. Second, over a long-term horizon, under-investing in equities has historically led to lower portfolio returns, all else equal. In this hypothetical scenario, an average female portfolio allocated to global equities and global aggregate bonds based on the splits noted above would have yielded a 43% return between 2012 and 2022. When applying the asset allocation weights of an average European male, the same assets would have yielded a 16-percentage point increase in cumulative returns, just by virtue of taking a little more risk and owning a little less cash.
Source: Bloomberg and Goldman Sachs Asset Management. Data reflects monthly returns from January 2013 to December 2022. Equities refer to the MSCI ACWI Index. Bonds refer to the Bloomberg Global Aggregate Bond Index. Monthly cash return is based on the 1-month LIBOR. GROWTH OF $100: A graphical measurement of a portfolio's gross return that simulates the performance of an initial investment of $100 over the given time period. The example provided does not reflect the deduction of investment advisory fees and expenses which would reduce an investor's return. Please be advised that since this example is calculated gross of fees and expenses the compounding effect of an investment manager's fees are not taken into consideration and the deduction of such fees would have a significant impact on the returns the greater the time period and as such the value of the $100 if calculated on a net basis, would be significantly lower than shown in this example. The hypothetical historical returns were created with the benefit of hindsight using the percentage allocations indicated above. Any changes will have an impact on the hypothetical historical performance results, which could be material. Hypothetical performance results have many inherent limitations and no representation is being made that any investor will, or is likely to achieve, performance similar to that shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved. The result will vary based on market conditions and your allocation. Past performance does not guarantee future results, which may vary.
In our view, maximizing the probability of reaching financial targets can partially be solved with setting strategic asset allocations. The decision to do so may require wealth-planning expertise and partnership with the right professionals.
We believe a few practices can help bridge the financial gap for women in this decade.
Growing income: Following the great reset in fixed income yields, we believe there is a plausible path to earning attractive coupons on bonds without having to take on significant credit risk. As the band of returns between equities and bonds has begun to narrow, we think the advantages of owning fixed income—predictable cash flows and diversification potential—have returned.
Allocating to return-generating assets: While fixed income assets are a critical risk-managing tool for portfolios, real portfolio growth may require some allocation to equities. For a moderate risk profile, we advocate for a blend of US and non-US equity allocations across a portfolio’s equity exposure.
Positioning assets in a volatile world: The uncertainty in the road to retirement makes financial planning difficult. We believe this decade will feature lower economic growth, higher rates, and elevated inflation, resulting in more episodic volatility. To address this risk, we believe portfolios should consider alternative assets with differentiated return streams and lower volatility to the market.
1 Boston Consulting Group (BCG), as of April 2020. https://www.bcg.com/publications/2020/managing-next-decade-women-wealth
2 McKinsey, as of June 23, 2022. https://www.mckinsey.com/industries/financial-services/our-insights/wake-up-and-see-the-women-wealth-managements-underserved-segment. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. The economic and market forecasts presented herein are for informational purposes as of the date of this document. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this document.
3 Vanguard and Plansponsor, as of February 2023. https://institutional.vanguard.com/insights-and-research/perspective/a-preview-of-how-america-saves-2023.html and https://www.plansponsor.com/retirement-account-balances-dipped-20-in-2022-trading-was-at-lowest-in-20-years/
4 National Association of Plan Advisors, as December 6, 2022. https://www.napa-net.org/news-info/daily-news/recession-fears-driving-investors-rethink-retirement-timing
5 Administration of Community Living and US Department of Health and Human Services, as of February 18, 2020. https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
6 US Bureau of Labor Statistics, Report 1097, as of March 2022.
7 US Senate Joint Economic Committee, Gender Pay Inequality, Consequences for Women, Families, and the Economy, as of 2016.
8 US Government Accountability Office, The Gender Pay Gap and Its Effect on Women’s Retirement Savings, as of March 24, 2021.
9 Goldman Sachs Asset Management, Women & Retirement Security: Navigating the Financial Vortex, as of December 7, 2022. https://www.gsam.com/content/gsam/global/en/market-insights/gsam-insights/2022/women-retirement.html#section-#introduction
10 Administration for Community Living, 2018 Profile of Older Americans, as of May 31, 2019.
11 Ellevest, The State of Women’s Financial Wellness in 2022, as of August 2022.
12 US Census Bureau, Those Who Married Once More Likely Than Others to Have Retirement Savings, as of January 13, 2022.
13 FINRA Foundation and University of Chicago, Investing 2020: New Accounts and the People Who Opened Them, as of February 2021.
14 Federal Reserve, Economic Well-Being of US Households (SHED), as of February 2023. Data assesses US households from January 2021 – May 2022.
15 ADP Research Institute, Illuminating the Shadow Workforce: Insights into the Gig Workforce in Businesses, as of February 2020. https://www.adpri.org/wp-content/uploads/2020/07/Illuminating-the-Shadow-Workforce-Full-Report.pdf
16 Georgia State University Law Review, Volume 8, Issue 2, Women, Retirement, and the Growing Economy Workforce, as of April 2022.
17 Goldman Sachs Asset Management, Empowering Women: How COVID-19 Has Affected the Gender Gap, as of March 2020.
18 SoFi, Examining Male vs. Female Investment Behavior, as of November 7, 2018. https://www.sofi.com/learn/content/male-vs-female-investment-behavior/
19 Vanguard, The same but different: Gender and investor behavior in Vanguard retail accounts, as of May 2020. https://corporate.vanguard.com/content/dam/corp/research/pdf/The-same-but-different-Gender-and-investor-behavior-in-Vanguard-retail-accounts-US-ISGRGD_052020_Online.pdf
20 McKinsey, as of June 23, 2022. https://www.mckinsey.com/industries/financial-services/our-insights/wake-up-and-see-the-women-wealth-managements-underserved-segment
Bloomberg Global Aggregate Bond Index measures global investment grade debt from 24 local currency markets, including treasury, government-related, corporate, and securitized fixed-rated bonds from both developed and merging market issuers.
MSCI All Country World (ACWI) Index is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. It comprises of stocks from 23 developed countries and 24 emerging markets.
One-Month LIBOR refers to the ICE one-month London Interbank Offer Rate.
CAGR refers to the compound annual growth rate.
Gig economy refers to activity where people earn income providing on-demand work, services, or goods.
US CPI refers to the US Consumer Price Index.
Volatility is a measure of variation of a financial instrument's price.
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