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Race and Retirement

I thought long and hard before writing this week's post, but I believe the report I'm referencing illustrates a financial planning problem that isn't receiving the attention it deserves.

This week's blog is going to be controversial. I thought long and hard before writing it, and you may take offense in reading it. But I believe it illustrates a financial planning problem that isn't receiving the attention it deserves.

I recently read a Vanguard Funds institutional research report (see attachment). Vanguard wanted to examine participation in its clients' 401(k) accounts; this is common, I see similar reports released all the time.

What was different in this case? Vanguard separated its participants by their ethnicity, to create four distinct ethnic categories: Whites, Asians, Blacks, and Hispanics (their terminology, not mine).

Vanguard used six group retirement plans with over 200,000 employees, and judged them to be a representative sample of all plans. In each of the four ethnic categories, participants' average ages were roughly the same (early 40s). But here's where they differed (using rounded numbers for clarity):

Whites: average annual income: $59,600. Average 401(k) account balance: $63,600.

Asians: average income: $74,400. Average account balance: $73,300

Blacks: average income: $39,400. Average account balance: $21,700.

Hispanic: average income: $45,900. Average account balance: $30,000.

To put it another way: compared to Whites, Asians had an additional $9,700 in their 401(k)s, Blacks had almost $42,000 less, and Hispanics had $33,600 less.

It is these latter two ethnic groups I wish to discuss, and I mean no offense in doing so.

We often hear that African- and Hispanic-Americans have lower average pay than Caucasians. This seems accurate, and is borne out by the data in Vanguard's study.

What we don't hear is how this disparity affects retirement savings. Even though the average worker in the study is relatively young, there's already a substantial difference in retirement assets between the different ethnic groups.

What causes this difference? Vanguard ran statistical models, and found four factors: compensation, job tenure, contributions, and withdrawal rates. Compensation, not surprisingly, was the major factor: African- and Hispanic-Americans have lower average annual incomes, and their account balances reflect this. The other three factors were relatively minor. I did find it scary, as a financial planner, to see the difference in hardship withdrawal rates: 17%, 7%, 40%, and 23% of accounts respectively.

So, how can we fix this problem? Many of the causes are far beyond the scope of this blog, and may even extend past our lifetimes.

That said, Vanguard did find one solution: automatic enrollment. Using this policy, all new workers at a company are automatically signed up for 401(k) contributions, whether using their own money, or via corporate funds.

The difference is striking. In companies with voluntary employee contributions, the participation rate by ethnicity is 77%, 95%, 64%, and 70%, respectively. With automatic enrollment, participation rates not only increase to roughly 96%, but equalize there as well, regardless of ethnicity.

I don't care which ethnic group you're in; I'm more concerned with your quality of life. No matter which part of the world your ancestors hail from, or your level of income, keep saving as much as possible to fund your retirement and increase your net worth. But if you're African- or Hispanic-American, know that you have one extra hurdle you may not have planned for. And for anyone who finds it difficult to voluntarily save, consider asking your employer about automatic enrollment. The extra savings, compounded over your working years, can be the difference between a comfortable and a stressful retirement.

Lou Dagen is a Certified Financial Planner in the San Francisco Bay Area. For 23 years, he has helped clients around the world retire in comfort, educate their children, and increase their net worth. If you have questions, please post them in the comments below or call Lou directly at 925-997-8507.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

"The Black Panther of Poetry" January 26, 2013 at 09:09 PM
I think we live in a society that doesn't push for educating its' citizens about their economic well being and welfare, if you will. On the contrary, this society, in my opinion, find it easier to dole out welfare on an in-humane scale as oppose to emphasizing how one can become financially independent of Government Welfare. Hell, from birth and until death, a kid will get far more education about vaginas and penises than they will ever get about becoming financially independent. I mean just think about it; a nation of dependents are more valuable to the one percenters than a nation of financial independents. The power structure and the greedy stays in control that way and the needy stays needy, continuing to perpetuate this farse of fairness and democracy that we call America. But alas, the tides are changing and soon the truth will reign across this Great Land because people are standing up. People have had enough!!!
"The Black Panther of Poetry" January 26, 2013 at 09:47 PM
HAD ENOUGH!!! We’ve heard all your lies had enough Your pathetic Alibis had enough Your selfish “pie in the sky” had enough The hidden and disguised had enough You took us for a fool Shame on you You’re just a lying tool You’ll get your due We should have seen your game Shame on us Our patriotism was all in vain In God we Trust' But now we’re all aware had enough Our trust is small but there had enough It’s time for Laisezz-Faire HAD ENOUGH! HAD ENOUGH! HAD ENOUGH!
Chris Nicholson January 26, 2013 at 10:59 PM
If they had the data, they should have sorted by highest level of education of the participants. The biggest driver of savings is earnings. The biggest driver of earnings is education. The biggest driver of education is parents' income (and, therefore, parents' education). It's a cycle. It can be virtuous or vicious, with the biggest controllable factors being cultural. The solution is not to get minorities to save more. The solution is encourage all Americans to increase their earnings potential via education and training. This starts at home, not in Sacramento or D.C.
Alicia Chatman January 31, 2013 at 05:12 AM
Education and trust are so important. If you are someone who isn't educated in a certain area and you don't trust certain establishments, it is much harder to get involved in programs that actually will benefit you. Automatic enrollment and limited withdrawal options are so important to having funds at retirement.
Andrew Peceimer February 01, 2013 at 06:37 AM
Chris your solution of not saving more money is silly and troubling. I sugest you check out the following link for some interesting information about wealthy people. http://www.nytimes.com/books/first/s/stanley-millionaire.html

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