Do women need to plan differently for their financial future?

In most respects, women’s long-term financial planning needs are exactly the same as men’s. They need to fund their retirement, build financial resilience, and protect their savings against erosion by inflation. However, they may face significant challenges in achieving those goals.

Women control an increasingly larger share of financial resources. Within the European Union, assets controlled by women grew from $4.6 trillion in 2018 to $6.6 trillion in 2023, according to McKinsey, 38% of total assets under management. The consultancy projects that female-controlled assets will reach $11.4 trillion, 47% of aggregate EU assets, in 2030.

However, the financial industry has been slow to wake up to some of the financial planning challenges for women. It still assumes a model in which individuals save diligently through an unbroken career, retire at a fixed age and go on to enjoy their accumulated retirement wealth. It has not been good at accommodating career breaks, variability in earnings, or the gender pay gap.

In 2020, women in the EU aged over 65 received pensions that were on average 28.3% lower than those for men.

Career breaks

While patterns are gradually changing, it still tends to be women who shoulder the bulk of caring responsibilities, for children and for elderly relatives. In the EU, women report spending an average of 39 hours per week caring for their children, compared with 21 hours for men, according to the European Institute for Gender Equality. Caring responsibilities are estimated to keep 7.7 million women out of the labour market at any particular time, compared with just 450,000 men.

This can present challenges for financial planning. For example, it can lead to a break in pension contributions and, at worst, a permanent impairment in women’s long-term financial resilience. In 2020, women in the EU aged over 65 received pensions that were on average 28.3% lower than those for men. A second problem is that women tend to live an average of around five years longer than men, meaning they need to build up additional savings.

The effect of a career break is magnified over time. Not only do women miss out on contributions, they miss out on the compounding effect of those contributions. If they lose, for example, €50,000 in contributions by taking 10 years out to care for children, this could compound to a loss of between €200,000 and €250,000, assuming a growth rate of 5%, in their final pension fund 30 years later. In addition, if women are also called upon to help care for elderly relatives in later life, it may compromise their ability to make good any deficit.

The effect of a career break is magnified over time – not only do women miss out on contributions, they miss out on the compounding effect of those contributions.

Starting early

There are a couple of ways to address this. The first is to ensure that women are saving as much as possible as early as possible. That way they receive the maximum benefit from compounding, and any gaps in their contributions later don’t matter as much.

Take the example of two investors. Investor A puts €500 a month into the stock market from the age of 18 and keeps on doing so for the next 20 years. By the time she reaches 38, based on an unexceptional annual return of 5%, her investment would be worth €205,000. Even if she were to make no further contributions, but her investments continued to grow at 5% return each year, by the time she reaches 65 their value would have grown to €789,000.

By contrast, Investor B, doesn’t start investing until she is 38. Even if she invests the same €500 a month and achieve a 5% return, and although she will be investing for seven years longer, it’s impossible to catch up. At the age of 65, Investor B’s portfolio is worth €341,600, less than half of that of investor A’s. Saving early is vitally important for women whose pension contributions may be less consistent or predictable.

Contributions for non-working spouses

The second approach is for couples to continue making pension contributions for a spouse during periods when they are earning little or nothing. Rules on how much non-earners can contribute vary from country to country, but contributing for a non-working spouse is usually a tax-efficient option and can help equalise pension arrangements.

The gender pay gap is a more intractable problem. Pension contributions from employers are usually based on a proportion of salary, so this has an impact on overall pension savings.

The gender pay gap is a more intractable problem. Pension contributions from employers are usually based on a proportion of salary, so this has an impact on overall pension savings. The average gender pay gap in the EU stood at 12% in 2023. It has remained relatively persistent over time, and increases with age – almost certainly as a result of career breaks.

However, the gap varies considerably between countries. Luxembourg, for example, has largely closed the gender pay gap – there are slight variations in the way it is measured – but it remains at 18% in Austria and Germany. The gap is also wider in specific sectors; for example, it is higher in the private sector than in the public sector in most EU countries.

Risk aversion

Women are less likely to participate in financial markets than men, which has led to a phenomenon called the ‘gender investment gap’. Women own 30% to 40% less in investments and private pensions than men, meaning that even when they do save, their assets do not grow as fast, and they don’t benefit from the same protection against inflation. A 2024 survey found that only 18% of women invest regularly, compared with 31% of men, with the gap particularly pronounced in countries such as Germany.

There is considerable debate as to whether this is a function of natural risk aversion among women, or whether it is a sensible response to having less money, which means they cannot afford to take as much risk with their savings. Either way, it is a contributing factor to lower ultimate retirement savings and reduced financial resilience.

With this in mind, women should ensure they are taking sufficient risk with their investments. This sounds counterintuitive, but can help women’s savings grow faster over time and close the gap with men. Any move out of cash or lower-risk investments does not need to be dramatic. Plenty of lower-risk investments exist that can offer balanced equity and bond market exposure while seeking to keep volatility as low as possible.

Financial planning for women needs to build in sufficient flexibility to accommodate differences in the way they generate wealth over a lifetime. This is not complex, but it does represent a challenge to the way traditional financial planning models have evolved.