According to the National Black Chamber of Commerce, African American entrepreneurship and college graduation rates are both on the rise; however, even as these rates increase, people of color still have less saved for retirement than the rest of the population.
This stems from a number of factors, including the fact that many people of color work for small businesses, which often do not have the same competitive 401(k) plans offered by larger companies. The Transamerica Center for Retirement Studies found that 5.6 million small businesses in the United States lack retirement savings plan options. These factors compound with issues such as the wealth gap and disparity in homeownership. In fact, between the ages of 47-64, white Americans had an average of $67,000 in home equity while people of color in this age range had zero.
Despite these obstacles, the best way to predict the future is to create it. The sooner people begin planning, the better. Saving enough by age 65 can seem daunting, but even with a late start, African Americans can still plan for and create the retirement they deserve.
- Evaluate risk tolerance and employer-sponsored retirement plans.
According to the Federal Reserve, the average African American’s 401(k) balance is $23,000. This partly stems from the fact that African Americans are less likely to invest in the stock market. While contributing to a 401(k) plan is an investment with risk attached, the benefits of participating can be very helpful, especially when the employer offers a contribution match. There can be uncertainty surrounding employer-sponsored plans, and seeking assistance from an objective financial professional is critical. Choosing suitable strategies that align with a family’s specific goals and needs is an imperative step toward bridging the retirement gap.
A financial advisor can help discern how contributions should be allocated, how much a participant should contribute and how various investment options may complement one another. After learning if their employer offers a matching benefit, participants should find out if there is a Roth 401(k) option and establish a personal budget so they can decide if contributing the maximum ($19,000 in 2019) is appropriate. It is also important to remember that people age 50 and older can take advantage of a catch-up provision (total contribution is up to $25,000 in 2019).
- Understand time horizon as it relates to different investment accounts.
As investors prepare for retirement they should have a firm understanding of what their fixed and variable expenses will be. African American families have cultural norms that impact how wealth will be protected, distributed, where it has accumulated and therefore how it will be taxed. Without proper planning well before a participant retires, retirement security can be very difficult to achieve. Most plan participants want to live a similar lifestyle to the one they had before retirement, and understanding their time horizon is crucial in planning for life after 65.
- Allot for longevity with a distribution plan.
Another factor African Americans need to take into account is their longevity. According to the Social Security Administration, the average 65-year-old can expect to live another 19 to 21 years in retirement. African Americans are now living longer than ever before as well, with the CDC reporting, “black Americans who live to 65 may now expect to live longer than whites of the same age.”
As life expectancy rapidly increases, retirees now need to save for almost a quarter of their lifetime. This may lead African Americans to rethink the way they withdraw funds during their retirement. As such, creating a distribution plan is in the best interest of every African American saving for 65.
Retirees should typically begin by withdrawing from non-qualified taxable and tax-deferred accounts, while tax rates are lower. Then African Americans can move on to tax-free accounts to maximize the value of each of their retirement savings. Developing a diversified retirement account is only half of the work; a sound distribution plan will create the security retirees spend decades preparing for. Working with a trusted financial advisor can help navigate these decisions and create a plan tailored to each individual’s needs.
- Make saving for retirement a priority, even while paying back student loans.
Many African Americans in the workforce have student loan debt hanging over their heads and saving for retirement may seem out of reach. This issue can hinder younger people of color especially and make it difficult to save at all. The Federal Reserve found that African Americans have $19,000 on average in liquid assets by their 30s, compared to the $130,000 of the general population.
To best allocate their disposable income, African Americans should begin by writing out what they pay on student loans monthly and the amount they can realistically contribute to their retirement account per paycheck. Even a small percentage will make a huge difference down the road. Plan participants should write down each loan and the interest it is accruing, then prioritize paying off the loans with the highest interest rates first, finishing by paying off lower-interest accounts.
Retirement plans consist of automated contributions, meaning plan participants can budget as soon as they get their paycheck. African Americans who are sole proprietors or self-employed should set up an automatic withdrawal into a retirement account each month. The goal is to save 15-20 percent of one’s salary; if that seems unattainable, a financial advisor can help work up to that amount.
- Understand Social Security income.
According to an Associated Press poll, 38 percent of white Americans said they had sufficient money for retirement, compared to 20 percent of African Americans surveyed. Making matters worse, people of color are less likely to receive Social Security, with 62 percent of African Americans collecting Social Security benefits compared to 82 percent of white Americans.
Employers are required to pay half of their employees’ Social Security contribution and the other half is taken out in taxes. Self-employed African Americans should make sure they are contributing on their own behalf in order to have another stream of income during retirement. Within 10 years of retirement age, people can calculate what their Social Security checks will look like and budget ahead of time. The Social Security Administration offers this online calculator to estimate the amount people will receive upon retirement.
- Plan for long-term care.
Another important aspect of effective retirement planning for African Americans is preparing for and understanding how long-term care expenses will be paid. In the African American community, family members may be expected to leave careers to stay home with an elderly family member who requires assistance. These expenses can quickly deplete a retirement nest egg and investors should plan for this scenario.
A Northwestern Mutual survey found that 34 percent of current caregivers spend between 21 and 100 percent of their monthly budget on caregiving expenses. As health care costs continue to rise, African Americans should consider the expense of professional care services when saving.
- Allot for family costs.
More and more Americans are using retirement dollars to help pay for their children. A 2018 report found that 72 percent of Americans are willing to put their children’s interest ahead of their own; specifically, African American parents were even more likely to sacrifice savings for their kids. Balancing supporting children along with aging parents while nearing their own retirement can be a hurdle many African Americans face.
African Americans should decide the capacity they can help their children while still saving for retirement. Setting clear boundaries early on can help combat the issue later in life.
- Consider annuities and pensions.
Living longer than ever before, many African Americans will need more than the traditional 401(k) and social security income streams. While planning for 65, retirees should consider pensions and annuities that will provide steady paychecks throughout retirement. Purchasing either an income annuity or deferred annuity helps mitigate the risk of running out of money during retirement, while adding a dependable revenue stream. Because they generally come with guarantees market investments do not offer, annuities create a tax-deferred nest egg for retirees and their families.
Insulated from market volatility, annuities and pensions can provide peace of mind during longer retirements. African Americans can meet with a financial advisor to find the best annuity for their goals and should heavily research the company they would like to take the annuity from.
Author: Allan K. Bell, Financial Advisor with Northwestern Mutual Wealth Management Company