By Ralph Bovitz, CPA, PFS
Women attorneys must be financially independent. Married or not, women
attorneys must be prepared for the full range of financial possibilities.
Consider those who are financially dependent upon you – children, aging
parents and in-laws, should your husband die or become disabled. Thus,
women should be sure to have disability insurance for themselves, if they
are single or single mothers and working. The likelihood of becoming
disabled is statistically more likely than death. For married women not
currently practicing law, be sure your husband has adequate disability
insurance, since the same statistic holds for him, that disability is more
likely than death. A disability insurance premium, to cover the tasks an
attorney cannot perform, is usually expensive and often difficult to
obtain. But, efforts should be made to obtain own-occupation disability
insurance. You may be forced to take alternative employment to obtain
benefits, if the policy is not own-occupation. Disability benefits are
usually pegged to about two-thirds of your earned income; when you pay the
premiums, the benefits are tax-free.
Single women attorneys, having no
dependents, may not need life insurance. Attorneys who are single-mothers or
have financial responsibilities for parents, can get the most life insurance
for the least cost by buying term insurance. Term insurance can be
purchased for a specified period of time, or term, at a fixed and
surprisingly low premium. The higher premiums for non-term policies, like
whole life, take the extra premium and invest it to make up cash values.
Substantially more insurance (death benefit) is realized from a term
insurance policy than a whole life policy, for the same premium. Life
insurance should be used to provide the money to meet the financial goals
you have for your family and the responsibilities you have to your family.
As a rule of thumb, an attorney might buy a term policy for about 10-20
times their annual earned income. This will provide a pot of money that,
when invested in savings accounts or high-grade bond funds, should produce
an income stream that will help replace the earnings lost due to your (or
your husband’s) untimely death. You want to purchase a term policy for a
period of time that will produce an income stream until your youngest child
is at least 18. If you are not practicing law and staying home with the
children, your untimely death may require day-care for the little ones. The
cost of such services would dictate the amount of term insurance on your
life, necessary to produce an income stream to meet those added costs
While both men and women must save for
retirement, on average, women live longer than men. Women, sometimes
earning less than men, have the dual problem of needing to save more out of
a smaller income, to finance their longer life expectancy. An underlying
cause of financial insecurity for women may be shorter job tenure, i.e.
taking time out to have and raise children or caring for elderly parents.
Shorter job tenure affects pension buildup, due to a loss of vesting in the
pension or limited contributions to a 401 (k) retirement plan. To remain
flexible in their family responsibilities, women attorneys sometimes work
for smaller firms, which often do not have retirement plans, like 401 (k).
Male attorneys, on the other hand, usually approach employment with an
expectation of employer-provided retirement plans, “or I am not going to
work there”. In addition, women have historically relied upon men for
financial support, causing a belief that they cannot handle money
competently. Therefore, many women worry about being impoverished in old age
and rightfully so.
For many women, meeting immediate goals,
like the children’s education and a home are typical. Thus, women are often
more concerned about temporary investment losses, due to their near-term
goals. Near-term financial goals are generally defined as materializing in
five years or less. That’s why funds needed in the near-term should be
conservatively invested, such as in savings and money market accounts or in
short-term United States Treasury securities; funds needed to meet immediate
goals is not the time to invest in the stock market.
Women often take too little risk in
their retirement investments, by investing in savings accounts and not in
stocks or stock mutual funds. Taking too little risk means failing to beat
inflation, due to lower investment returns characteristic of bank accounts.
Since no one can accurately or consistently predict the direction of the
stock market, we need to look at market history. Yes, the market is down
today, because of September 11, for example. However, it was also down
after World War II started, after President Kennedy was assassinated, and
after the Gulf War started. However, despite all of these calamities, the
market recovered. You can get into the stock market by buying a total stock
market index fund. Such a fund will expose your investments to the market
as a whole and the annul management fees for such funds are quite low. Thus
money needed for near-term goals should be in conservative investments, like
bank accounts and US Government securities. Funds needed for retirement
should be in the stock market, which has traditionally returned more than
banks, over long periods.
Generation-X women have been found to
have the following financial lifestyle. You live from paycheck to paycheck.
You have substantial credit card debt. You don’t participate in your
employer’s retirement plan. You tend to spend and not save, either in an
employer provided retirement plan, your own individual retirement account
(IRA) or in taxable investment accounts.
Less than half of Generation-Xers
believe the best way to create long-term financial security is through
investments in equities, stocks and stock mutual funds. Yet, historically,
equities have proven to be the correct route to financial security. More
than 50% of Gen-Xers believe savings accounts, money market accounts and
certificates-of-deposit (CDs) will result in financial security.
Historically, this has proven not to be the case, due to inflation eroding
buying power. Savings accounts and bonds have a place in your portfolio but
so do stocks, to provide growth in your retirement portfolio and minimize
the adverse effects of inflation.
Women attorneys need to become acquainted with investment terminology. One
study found that women are often unfamiliar with financial terminology.
Knowing many of the investment buzz words will enable you to put brokers and
financial planners on their toes when you speak to them. Let’s test your
familiarity with some investment principles:
The benefit of your retirement account is tax deferral; your money is
allowed to grow year-after-year without payment of income taxes on the
growth or on the income the account earns, until you make withdrawals from
the account at retirement. And, there are no taxes to pay on retirement
withdrawals from a Roth Individual Retirement Account.
Compounding is earning money on money. Thus, a 25-year-old attorney, making
an annual retirement account investment of $1,000, that earns 8% per year,
will have nearly $280,000, at age 65. If you wait until you are 35 before
you start saving, you would have to save over $2,250 a year, to accumulate
nearly $280,000, by age 65. This is a classic example of compounding; less
money can grow into more money, the longer you invest it!
Diversification. This means not putting all of your money in any one type
of investment, such as everything in big companies, small companies, savings
accounts, bonds or real estate. It also means not putting all of your
money into any one industry, company or country. Thus, an investment in
Ford Motor is the same as buying General Motors stock, while buying shares
in Disney, instead of General Motors, is not.
Not all women act the same when it comes to finances. Nevertheless,
recognizing that your gender may predispose you to certain attitudes and
behavior should help you overcome those that may damage your financial