Saving for retirement isn’t easy for most Americans, but it can be especially challenging for Black people and other POC. The National Institute of Retirement Security (NIRS) found that Americans of color nearing retirement had an average of $30,000 in savings. That’s far less than the average of their White counterparts, who had saved on average $120,000.
It’s Black History Month, but the racial retirement savings gap is real every day of the year. A lack of access to financial resources snowballs throughout life and makes it even harder to build a nest egg. To further close the gap in retirement savings, our communities will need to fix the system’s built-in financial hurdles that make it harder for members of the Black community to save for retirement.
The good news is, despite these challenges, it’s still possible to prepare for a comfortable retirement.
What’s Behind the Gap in Retirement Savings?
Racial wealth inequality is not a new phenomenon, but it’s in sharper focus as society finally begins to grapple with systemic racism. The gap in retirement savings is a byproduct of combined issues:
- Black Americans and people of color often earn less over their lifetime, with wages anywhere from 10 - 35% less than white peers
- BIPOC Americans are more likely to work for small businesses, which offer less access to 401(k) plans
- Black college graduates have significantly more student loan debt, making it harder to save for retirement early in their careers
- People of color have lower rates of homeownership, which can be a major source of financial stability in retirement
The gap is slowly closing as each generation sees increased access to education, upward mobility, and financial resources. By planning for retirement and building a more comfortable future for your family, you’re helping to chip away at the issues future generations will face.
Strike a Balance Between Student Loan Debt and Retirement Saving
It’s never too early to start saving for retirement. The power of compounding interest can mean a lot for your money over the course of decades.
As mentioned above, student loan debt is a major obstacle to saving for retirement early. If at all possible, our advice is to prioritize saving for retirement along with paying back student loans. Even a small monthly contribution will make a huge difference down the road. If your income hasn’t been affected by COVID-19 and you can still make payments throughout this emergency forbearance period, you will save a bunch on interest.
Maximize Employer-Sponsored Retirement Plans
If your employer offers a retirement savings plan like a 401(k), take full advantage of it! Sorting through the various options in an investment plan can seem daunting, but employer-sponsored plans are a great way to build wealth. The contribution comes out of your paycheck automatically, which makes saving for retirement EASY.
- If your company will match some or all of your contributions to a 401(k), make maxing out that contribution your top priority—it’s free money, after all
- Next, work to max out your annual contribution (up to the limit of $19,500/year for those under 50 and $26,000/year for people 50 and older)
- Avoid early withdrawals unless absolutely necessary, as they immediately become taxable and also carry a 10% penalty
- When you switch jobs and enroll in new 401(k) plans, be sure to either rollover old investments or keep track of them with the help of your financial advisor
Take Advantage of Social Security
Social Security helps shrink the gap when it comes to retirement income. Most Americans who have worked throughout their adult lives will be eligible to collect benefits. Your eligibility and benefits for this government-run program are automatically calculated based on your work and salary history. Even so, Whites are more likely to receive Social Security benefits than African-Americans and Latinos.
There are a few important steps to planning how Social Security fits into your retirement plans:
- Understand the benefits of Social Security and when you can start collecting
- Don't miss your enrollment date
- Use this online calculator to project what your monthly benefits will be
- Realize that you still need to contribute to other savings plans, as Social Security isn’t always enough to fund a comfortable retirement on its own
Avoid Conflicts of Interest With a Fiduciary Advisor
There’s no shortage of people who can offer financial advice. Commission-based advisors might be looking to sell you specific investments. Television personalities offer questionable stock tips at a rapid-fire pace. Unfortunately, many of those people focus more on enriching themselves than providing sound advice.
To protect your retirement investment portfolio, choose a financial advisor wisely. Understand the different types of financial advisors and how they get paid.
A fee-only financial advisor is a fiduciary, a professional who is legally bound to act in their clients’ best interests at all times. A fiduciary will never push you into an investment opportunity that benefits them, nor will they hide details or risk from you. A fiduciary advisor will provide a clear picture of your investment options, what they mean for your future and help you choose the best path towards a secure and comfortable retirement.
Looking for a financial professional you can trust to help you prepare for retirement? Learn more about fiduciary advisors with our downloadable guide.