How We Can Close the Racial Divide in Retirement Readiness
October 16, 2017
How We Can Close the Racial Divide in Retirement Readiness
By Carlos Garcia, CEO/Founder of Finhabits

It’s Retirement Security Week, a good time to check our nation’s financial health when it comes to retirement savings. So how prepared are Americans?


Unfortunately, that answer still depends largely upon race. The gap in retirement wealth between whites and minorities continues to widen, according to new data from the Federal Reserve’s Survey of Consumer Finances. In 2016, whites had median retirement savings of $77,000—three times more than African-Americans ($24,600) and Latinos ($22,600).



Reasons for the Savings Gap


Income inequality is an important contributing factor to the retirement savings gap, as it leaves minorities with less money to invest. But it’s only one part of the story.


Companies are moving from traditional pension plans to 401(k)s and IRAs. African-Americans and Latinos are less likely than whites to work for companies that offer these types of tax-advantaged savings programs. White families are thus twice as likely as minority families to have retirement accounts.


There are behavioral and cultural factors at play here, too. As Richard Thaler, winner of the 2017 Nobel Prize in Economics for his “nudge theory,” has noted, the move from automatic pensions to opt-in 401(k)s has forced employees to create the savings habit on their own. This can be challenging, as people tend to procrastinate and need small “nudges” from outside forces to help them make better decisions and form habits. Because minorities have a lower rate of retirement savings, they may encounter fewer nudges within their communities. Nudges could be as simple as being asked, “Have you opened a retirement account yet?”



The Gap Affects All Americans


A lack of retirement savings won’t just affect individuals’ livelihoods—it will eventually impact our country’s economic health. According to the U.S. Census, more than half of all individuals under the age of 18 are minorities.


By 2050, Latinos are projected to make up more than 30 percent of the U.S. population. If we don’t boost savings rates now, we could face a generation of impoverished seniors.


What We Can Do To Close the Gap


We need a consistent, focused effort to help minorities build retirement savings habits. As shown in the first chart above, more consistent savings helped whites double their money over the last 18 years while minorities saw more volatility and only 50 percent growth.


More employers need to offer retirement plans. And Thaler’s recommendation for employers to automatically enroll employees in retirement plans (unless they opt out) is a very good one.


New apps and technologies, such as Finhabits, can also make it easier for people without employer plans to invest on their own. They remove barriers by offering quick enrollment, low contribution minimums, and nudges to build the savings habit.


Taking the long view, we also need to work on policy solutions—such as the California Secure Savings Program—that will help minority families invest more. But this Retirement Security Week, let’s all start with a nudge: research retirement plans for your business, ask a friend or loved one about their retirement account, or increase your own contribution rate.


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