Racial gap exists in retirement planning, but no one saves enough

By Carrie Schwab Pomerantz Comments 0
Published: November 2, 2008

For the past 11 years, Ariel Investments, LLC, and Charles Schwab have teamed up to conduct the annual Black Investor Survey. The goal of this survey is twofold: To show the differences in how black and white Americans approach investing, and to raise awareness in the black community regarding the importance of investing.

While this year’s study revealed some interesting differences, what I noticed most was a glaring similarity: No one is saving enough for retirement. But the survey also hinted at a few ways to improve the situation. First, people who plan early are the ones who get ahead. And employers have a real opportunity to encourage their workers — all their workers — by providing the tools that will help them make informed decisions about retirement planning.

Participation is high

Participation rates in employer-sponsored, defined-contribution plans (401(k) and 403(b) plans) are actually quite high. The survey found that about 90 percent of those who have access to a defined-contribution plan defer part of their pay into it each month; that figure holds true for both groups. However, blacks contribute considerably less: An average of $169 per month versus $249 per month for white workers. That’s a difference of nearly 50 percent, which adds up. The median total household savings for black 401(k) investors is $53,000. For white investors, the median total household savings is $114,000. All those surveyed had household incomes of at least $50,000.

While it’s obviously beneficial that the majority of workers are contributing to their 401(k) accounts, it should be equally obvious that $53,000 is nowhere near enough for retirement, assuming that is the respondent’s primary financial asset. The median age for black respondents was 47 years old, while it was 51 years old for whites.

How much you’ll need

For some perspective: According to financial experts, if you want to draw $50,000 a year for 30 years from your retirement account, you will need to amass approximately $1.25 million by the time you retire.

The survey also discovered that many people underestimate the need for retirement income. In fact, 41 percent of black investors believed they would require just half of their current household income in order to have a comfortable retirement; 30 percent of white investors thought the same. While it’s certainly possible to live more cheaply after you retire, most people won’t want to make cuts in their standard of living. Plus, many retirees will face higher health care costs when they leave work. My advice is to assume you’ll need roughly the same income in retirement as you have now.

It’s clear that older investors are starting to realize that an early retirement is less of an option. Only 24 percent of blacks and 9 percent of whites over the age of 50 plan to retire by age 60. I suspect it signifies that they need to continue working. For some, this realization comes as a wake-up call: Of those under 50, 45 percent of blacks and 26 percent of whites plan to retire by 60. Clearly, some people have to adjust their expectations, but that kind of realistic thinking is good. With longer life spans today and the rising cost of health care, retirement can be much more expensive than most people understand.

Despite relatively equal participation rates in 401(k) plans, there’s been a consistent gap over the last 11 years between blacks and whites when it comes to stock investing. The percentage of whites who own stock has held steady at about 80 percent, while that number for blacks is generally 10 to 20 percent lower.

Carrie Schwab Pomerantz is chief strategist of consumer education for Charles Schwab & Co. Inc., member SIPC. You can e-mail Carrie at askcarrie@schwab.com.