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U.S. Faces Severe Racial Divide in Retirement Planning

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Financial planners already know that this country is facing a “retirement crisis,” with a majority of Americans having insufficient assets to provide for the comfortable retirement they dream of. Indeed, the current generation of older workers heads into retirement less financially prepared then the generation before them.

Now we have word from a major new study that the typical household of color in the U.S. has no retirement savings at all.

That is the finding of the National Institute on Retirement Security in its recently released report, “Race and Retirement Insecurity in the United States.” Written by Nari Rhee, manager of research for the NIRS, the study calculates the retirement security racial divide in this country. Every racial group faces risks, the study reveals, but people of color face especially severe challenges preparing for retirement.

“I’m alarmed by the severity of the retirement racial divide,” Rhee said. “It’s well documented that regardless of race, the typical working-age American household is far off track toward accumulating sufficient savings to meet their basic needs in retirement. As we dig deeper into the data, we find an even worst situation for blacks, Latinos and Asians.”

Rhee gives the example of the percentage of workers by race that work for employers who provide retirement savings plans of some type.

“For example, only four out of ten Latinos and about five out of ten Asians and blacks work for employers that sponsor retirement plans, compared to six out of ten white employees. With low access to retirement plans and low wages, what we’re ultimately seeing is little if any retirement savings among people of color,” according to Rhee.

A very disturbing trend

“A few pieces” in this new study have been done by the NCIS before, but this report is the first full look the organization has taken at racial differences in retirement savings and preparedness, Rhee said, adding the results are very disturbing.

“We know there is racial inequality in terms of earnings, but still this notion that two-thirds of blacks and Latino have no retirement savings is fairly startling,” Rhee said.

The other most significant finding of the study is that the retirement race gap is greatest as you go up the age ladder. So workers nearing retirement see the greatest gap. This is especially troubling, Rhee said, since the Baby Boomers have little time left before retirement to make up for their lack of retirement savings.

To illustrate the extent of the problem, Rhee says a typical white household has approximately $30,000 in retirement accounts as workers reach retirement age, and another $112,000 in retirement savings. That is obviously not enough to provide for a comfortable retirement for one individual, let alone a couple. But consider the plight of the typical black or Latino household, which as they reach retirement age has $20,000 or $18,000 respectively in savings, and nothing set aside in a 401(k) or IRA.

What the study found

Rhee said the race and retirement study revealed several key trends, none of which were encouraging. They are:

Workers of color, in particular Latinos, are significantly less likely than white workers to be covered by an employer-sponsored retirement plan – whether a 401(k) or defined benefit (BD) pension.

  • 62 percent of white employees work for an employer that offers a retirement plan, compared to 54 percent of blacks or Asians, and 38 percent of Latinos
  • 42 percent of Latinos, 15 percent of blacks and 13 percent of Asians in the private sector are less likely than whites to have access to a job-based retirement plan; compared to 12 percent, 10 percent, and 9 percent respectively in the public sector.
  • 24 percent of white households have access to a DB pension, compared to 16 percent of black households.

Households of color are far less likely to have dedicated retirement savings than white households of the same age. At the same time, retirement coverage appears to be positively associated with the existence of dedicated household retirement savings in both groups.

  • 69 percent of Latino and 62 percent of black households respectively do not own assets in a retirement account, compared to 37 percent of white households

Households of color have substantially lower retirement savings than white households, even after controlling for age and income.

  • Approximately 80 percent of Latino and 75 percent of black households age 25-64 have less than $10,000 in retirement savings, compared to approximately 50 percent of white households.
  • Only 19 percent of households of color near retirement have retirement savings equal to or greater than their annual income, compared to 41 percent of white households.

“American workers and families face a retirement crisis in which a majority of households are at risk for downward mobility in retirement, and a significant share face not being able to meet basic expenses in old age,” Rhee said.

Indeed, Rhee said the “Race and Retirement Insecurity” report serves as a companion to the NCIS July 2013 report, “The Retirement Savings Crisis: Is It Worse than We Think?” That study found that American workers today are less prepared for retirement than any point since 1979.

But the retirement crisis “is particularly dire for blacks,” Rhee says.

“With little else to depend on besides Social Security when they retire, people of color are especially vulnerable to reliance on public assistance and economic hardship in old age,” Rhee said. “Our research makes it clear that placing a special focus on improving the retirement readiness for Americans of color is absolutely essential to solve the national retirement crisis.”