The “2013 African American Financial Experience” study shows this population’s wealth building is weakened by competing financial priorities and lagging investment product ownership. While the general population expresses great concern about adequate retirement savings, African Americans pay more attention to paying off debt.
African Americans remain significantly more confident and optimistic about their financial future than the general population, the study found: half the respondents said they were better off now compared to a year ago, while just about a third (33%) said they were better off.
In a panel discussion about the study’s findings, Michael Davis, vice president of stable value at Prudential Retirement, said African Americans place great emphasis on education and family. Many place great trust in churches and other faith-based organizations for financial information.
“They are very concerned about debt,” he said, in part because of the importance of education.
Much of the debt comes from student loans. The study found that the general population tends to focus on retirement as a chief financial concern, but, according to Marc Morial, president of the National Urban League, the nation’s largest civil rights organization, “Crushing student loan debt is a headwind for African Americans,” who are keeping their focus on the near term rather than longer-term financial goals.Four in five African Americans (80%) who are eligible to participate in employer-sponsored retirement plans do so, which is just under half of all African Americans, according to the survey. Participation is higher among college-educated and affluent African Americans. But about a quarter of those who are eligible contribute less than the amount matched by their employer or not at all: this is 10 points higher than in the general population.
Debt Motivates 401(k) Withdrawals
Similar to Prudential’s research of 2011, African Americans are more likely to take money out of their retirement plans: about three in 10 have taken loans or made withdrawals, citing debt as the major reason (53%) for doing so.
The median retirement savings amount for African Americans is $9,000, compared with $20,000 for the general population. “They need to start saving earlier, save more, and leave the money in,” Davis said.
Retirement comes earlier for many African Americans. On average, they expect to retire (and they do) earlier than the general population, despite lower retirement savings. One in four non-retired African Americans expects to retire before age 60, compared with one in five of the general population. The expectation of an earlier retirement aligns with the experience of the current retirees surveyed: the average retirement age for African Americans (56) is significantly lower than for the general population (59).
Given that retirement tends to come sooner, early preparation is especially important. One in five African Americans says that concern about their ability to retire keeps them up at night, and one in four is worried about the future of Social Security. The good news is that the majority (55%) say that saving for retirement is an important priority, and half (52%) have started to do something about it.
“When it comes to having a more positive financial outlook, African Americans are driven not by a single fact but a wider range of considerations than the general public,” said Valerie Coleman Morris, a financial literacy specialist. “Assets tell only part of the story: African Americans place less emphasis on assets and more emphasis on life insurance protection, debt, household expenses and health care costs.”
Greater Diversification Needed
The study found that African Americans own life insurance or disability products at rates equal to or greater than the general population, but are about half as likely as the general population to own investment products, such as IRAs, mutual funds, stocks and bonds. Davis pointed out that African Americans tend to own concentrated investments in credit unions or C.D.s, with very low returns. “They need to diversify,” he said.
In the general population, a single item—total household assets—accounts for nearly half (47%) of the financial outlook, Coleman noted. “Among African Americans, household assets account for only 17% of the confidence score while the level of life insurance protection is 22%. Liabilities (including health care costs, household expenses, debt, and their children’s or grandchildren’s financial future) account for 31% of African Americans’ financial outlook. That’s fully six times more than among the general population.”
As people live longer and continue to make strides in achieving financial security, “Money decisions are going to be critical,” Coleman said. “Longevity is part of our history, and one in three children will live to be 100, making financial literacy more important than ever.”
The study, conducted in March, polled 1,153 Americans who identify as African American or black, and 471 general population Americans on a broad range of financial topics. Respondents are ages 25 to 70, with household incomes of $25,000 or more and some involvement in household financial decisions. Among those meeting the survey criterion of $25,000 or more in household income, the median household income was $61,000.
The study can be downloaded from Prudential’s website.