Excluding Social Security benefits, Black Americans have, on average, just 14 percent as much retirement wealth as whites.1 Latinos don't fare much better, with only 20 percent as much retirement wealth as white Americans. What's behind this retirement race gap, and what could financial professionals do to help close it?
What's Behind the Retirement Race Gap?
The race gap in retirement savings is a multifaceted problem that may require a multifaceted result.
First, Black Americans have had only a few generations to build wealth—from slavery to Jim Crow laws to segregation. The opportunities for Black individuals to accumulate wealth and pass it along to the next generation have been few and far between. More Black families tend to be headed by a single individual (usually a female), and the combination of racism and sexism in the job market could mean that many more Black families live below the poverty level.
The pandemic further exacerbated this inequity, as many women left the workforce to care for young children or other relatives. Black and Latino communities were harder hit by the coronavirus than white communities, with significantly more Black and Latino individuals becoming permanently disabled or dying due to COVID complications.
How Can Financial Professionals Help Close This Gap?
There are a couple of proposals that could help close this gap on a societal level. These include:
- Lowering Social Security's full retirement age. Not only do more Black workers report that they have highly physical jobs, but they also have a statistically shorter lifespan—which could mean that they are forced into retirement at an earlier age (therefore receive less in benefits) and are more likely to pass away after receiving just a few years of benefits. Updating the early retirement reductions could allow those in physical jobs to retire earlier without being financially penalized.
- Reducing the number of earning years Social Security calculates. As of now, Social Security benefits are based on a worker's 35 highest-earning years. This means those who are forced out of the workforce to care for others may have their benefits reduced through no fault of their own. Lowering this to 25 or 30 years could potentially allow Black individuals to qualify for a higher Social Security benefit than would otherwise be available.
While financial professionals may not be able to put these proposals into action themselves, they do a lot on the individual level to help minorities improve their relative financial standing and helping them work towards saving appropriately for retirement.
- Conduct outreach to Black and Latino communities to increase financial literacy. Many people assume they can't afford a financial professional—or don't need one until they have more assets to manage. By engaging in educational and outreach efforts among underserved communities and showing them what a well-funded retirement could look like, you may increase financial knowledge among those who need it the most.
- Encourage business clients to enact automatic enrollment in retirement plans. The statistics are clear—businesses that automatically enroll their employees in retirement plans have far greater participation rates than businesses that require employees to opt in.2
- Offer self-serve financial management tools. Many retirement platforms offer self-serve tools like investment calculators and projections. These tools help people see how their funds are likely to grow—and how increasing or decreasing their retirement contributions may change this trajectory.
1 America’s Retirement Race Gap, and Ideas for Closing It, New York Times, https://www.nytimes.com/2020/08/14/business/retirement-inequality-racism.html
2 Turning the Tide on the Retirement Race Gap, Morgan Stanley, https://www.morganstanley.com/atwork/articles/retirement-planning-race-wealth-gap
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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