The golden years of retirement may be tarnished for people of color.
Not only do households of color have lower participation rates and balances in retirement plans, but they are also more likely to invest in less risky assets with lower returns and take hardship withdrawals and loans. All of those factors work together to contribute to the retirement race gap.
“It reflects an existing wealth gap in society – a racial wealth gap between Black and white. Retirement assets are one-way wealth is held similar to homeownership or other things,” says Chitra Aiyar, consultant at Just Futures and author of “Reclaiming Retirement for All,” a report that focuses on the challenges the non-profit sector faces around long-term retirement security.
The retirement race gap creates a vicious cycle of declining wealth for people of color that can exist across generations.
“If you’re earning a lot of money, but your parents don’t have enough to survive on, you’re spending money on them,” says Aiyar. “If you’re spending money on your parents, you’re probably not putting enough money into retirement, which gets passed on to your children. Nobody gets to become wealthy.”
Limited Access to Plans
People of color are less likely than white Americans to have a pension, 401(k) or an IRA. Access is often the root of the problem.
“Close to 40% of Hispanic workers work for employers who employ less than 25 people,” says Sudipto Banerjee, Vice President of Retirement Thought Leadership at T. Rowe Price. “Those small employers are much less likely to sponsor a retirement plan.”
For Black workers, Banerjee says access boils down to income.
“About 50% of them work for large employers with more than 1,000 employees,” he says. “They could work for large employers likely to sponsor a plan, but they are in low-wage jobs – think about the national restaurant or retail chains.”
Workers of color are overrepresented among front-line, essential workers who tend to work part-time and lack access to benefits like retirement plans.
“If you’re someone that works at Target, the local bodega or a fast food restaurant, you’re not a full-time employee,” says Jennifer Streaks, a Senior Personal Finance Reporter at Business Insider. “Full-time means less than 40 hours. You could very well be working 30 hours and still not have access to those financial instruments.”
A pension plan is a benefit plan maintained by employers that provide income to workers upon retirement. While pensions guarantee a lifetime income, fewer Black and Hispanic Americans reap their benefits. Only 16% of households of color have a pension plan with their current job compared to 24% of white households.
“Unless you’re still in a sector with pensions or you work for the government, then you become responsible for it (retirement savings) and you’re in charge,” says Aiyar.
Public sector jobs and the pensions they provide have been one of the most effective ways for Black families to enter the middle class since the 1960s, according to research from Demos, a policy research organization.
“The overall income-wealth gap is not fully offset but partially offset by retirement benefits because your pension was a fixed amount,” says Aiyar. “A white worker and a Black worker, if they worked the same amount of years at the same company, their pension amount is the same. What’s changed is that there has been a shift from pension plans to 401(k)s.”
The Nature of 401(k) Plans
401(k) plans are workplace retirement plans that allow workers to contribute a portion of their salary to be placed in an investment account.
“You’re in charge of not just saving for retirement, but you’re in charge of the strategy,” says Aiyar. “For a long time, that was the government and employers’ job. You worked. That money gets invested not by you but by somebody at the company.”
The nature of 401(k) plans has highlighted two phenomena that can contribute to lower retirement savings for people of color.
Minority workers typically start saving money at a later age because of lower income levels. Research shows that people of color, especially Blacks, tend to put their money in less-risky investments with lower rates of return. Aiyar believes the blame is often unfairly placed on Black people for their retirement participation levels.
“There are high returns, but there can also be significant losses and it’s different if you come from wealth and you have a buffer for that,” she says. “If your day job has nothing to do with finance, but suddenly you have to understand all of these things, the idea that everyday people should have to take this on is a fairly new historical phenomenon.”
More than half of Black and Hispanic households have no retirement savings compared to less than a third of White households. Lack of trust can play a role in participation rates. Historical racism like redlining, predatory lending and home appraisal discrimination are just three actions that have contributed to the erosion of Black wealth.
“The idea of asking people of color to trust people who look nothing like them and say, ‘I’m gonna invest in this way,’ it makes no sense,” Aiyar says. “You’re asking people who have historically been screwed and say, ‘why don’t you do this high-risk venture?’ Black people have learned experience of not trusting financial institutions and for a good reason.”
Dependence on Social Security
Since its inception in the 1930s, Social Security benefits have been thought of as one leg on a three-legged stool necessary for retirement – social security, a company or personal pension and savings or investments. A more significant percentage of minority retirees receive Social Security benefits compared to whites and for some Blacks and Hispanics, it’s their only source of income.
“A one-legged stool doesn’t stand,” says Aiyar. “From the beginning, the federal government wanted to be clear that your Social Security will not, nor is it intended to replace your income in full.”
Social Security’s progressive benefit formula typically benefits people of color more because they generally earn less than whites. But in September 2022, the average Social Security benefit was only $1,674 a month.
“If you are going to be fully reliant on Social Security, you’re going to lose at least a third of whatever you were living off of,” she says. “If you’re living at a lower income, that’s more likely to push you into poverty.”
Aiyar notes that the algorithms that determine Social Security payments typically work against Black retirees.
“It assumes a certain lifespan. You’re guaranteed that payment throughout your life, but on average, Black people die sooner, it’s not fixed to your needs. If suddenly you have bills to pay, you can’t take out more from Social Security.”
The typical white working family has about $50,000 saved for retirement compared to $20,000 for Black and Hispanic families, according to the Federal Reserve’s 2019 Survey of Consumer Finances.
One reason behind the disparity is financial priorities. The savings rates of Black and Hispanic families are lower than their white counterparts, as they struggle with student loans, medical and other types of debt.
“For Black participants, saving for emergencies is almost as important as saving for retirement,” says Banerjee. “Bringing down debt and saving for a down payment for a home is very important. Given that everyone has limited income and they have to allocate that in all these different buckets, it’s obvious that they will prioritize more immediate things.”
Their financial vulnerability has more people of color resorting to hardship withdrawals and loans than white people.
“Living as a minority in this country, you have competing expenses, whether it’s your car that broke down or you may have aging parents that you’re trying to take care of,” says Streaks. “If you lose your job, you might have to take a hardship withdrawal to continue to pay basic expenses because you don’t have six to nine months or a year of expenses saved up.”
Tackling the Retirement Race Gap
Retirement experts say retirees need to save at least $1 million to live comfortably. The racial retirement gap means that people of color will be unprepared to live out their golden years.
“For people of color, not being prepared for retirement means financial struggle at a time when you will be less able to work and earn income,” says Streaks. “Their quality of life will be poor when they need money, healthcare and solid living accommodations.”
Education and awareness are critical steps in eliminating the retirement savings gap. Streaks says instruction should begin at home and continue through college.
“When you hear you max out your 401(k), what does that mean?” she asks. “It’s about understanding that you’re investing for the long term, so it may not benefit you today or even this year. Your 401(k) and any retirement savings are for when you retire and stop working.”
Aiyar admits that there’s no magic bullet but suggests that automatic enrollment, automatic escalation and guaranteed contributions are three strategies that can improve retirement outcomes for people of color.
“It doesn’t solve everything, but what does it mean that we offer retirement as opposed to people having to jump through hoops even to begin getting it?” she asks.
Through her research of non-profit organizations, Aiyar found that diverse leadership can lead to solutions to help shrink the racial retirement gap. Organizations with people of color at the helm were more likely to have a guaranteed contribution and offer retirement benefits to part-time workers.
“What’s interesting is that when there’s leadership of color, it happens without making a big deal about it,” she says. “I don’t think they are thinking, ‘look at us, we’re trying to solve the racial wealth gap.’ People think about their experiences and then make retirement plans that make sense.”