Financial Desperation Can Derail Your Retirement Plan

I have never been a fan of the old saying, “Desperate times call for desperate measures.” Too often, I’ve found that acts rooted in desperation cause seemingly rational people to sabotage their future. Yes, it’s true; we’re coping with the most hostile economic environment our generation has ever faced. Today’s tough economy, however, is no excuse for making decisions that may ultimately wreck our long-term financial health.

Panic-stricken investors over the past several months have caused me serious concern, especially regarding the wealth-building prospects of African Americans. Too many of us have taken a knee-jerk, half-baked approach to financial management that will inevitably result in catastrophic consequences. In fact, I found a recent study from the Ariel Education Initiative, the nonprofit arm of one of our leading be asset managers, and consulting firm Hewitt Associates to be deeply troubling.

In a survey of roughly 3 million employees, researchers discovered that regardless of age or income, African Americans and Hispanics have the lowest participation and contribution rates to 401(k) plans. The study revealed that 66% of African Americans and 65% of Hispanics join such employee savings plans compared with 77% of whites and 76% of Asians. Moreover, Asian and white employees contributed 9.4% and 7.9% of their income, respectively, while Hispanics and African Americans invested 6.3% and 6%, respectively. Obviously, this trend meant smaller account balances for African Americans across all income levels: Black employees who earned between $30,000 and $59,999 held an average balance of $21,224, while their white counterparts had balances of $35,551; blacks who earned $120,000 or more saved $154,902 compared with $223,408 for white workers in the same pay range. The Ariel/Hewitt study also showed that African American workers are less likely than Hispanics, whites, and Asians to invest in equities; more than twice as likely as other workers to take hardship withdrawals; and two out of five borrowed from their retirement accounts compared with just one out of five white workers. [For more on the study, read Mellody Hobson’s "Total Return" column in our next issue.]

The bottom line: We are placing our financial security in jeopardy. According to Rethinking Retirement, a UBS/Gallup Index, Americans must engage in long-term strategic planning because, assuming that you leave the world of work at age 65, you should expect to spend at least 18 years in retirement; to pay more for healthcare; and to have a less secure income than previous retirees. In addition to losing 35% to 45% of a 401(k) withdrawal in taxes and penalties, you significantly compromise your retirement plans when you pull money out early and you increase the risk that you’ll outlive your assets.

My overall suggestion: Stop panicking and get back to basics. Use this time to re-evaluate your portfolio and recommit to sound, time-tested investment ideas. Embrace our Wealth for Life Principles, notably No. 6: I will devise an investment plan for my retirement needs and children’s education; and No.7: I will ensure that my entire family adheres to sensible money management principles.
Furthermore, keep in mind that maintaining a well-balanced portfolio is not a sprint; it’s a marathon. As I have often stated, engage in intelligent investing for the long haul. That means identifying quality stocks, adopting a buy-and-hold strategy, and continually monitoring your collection of assets. And don’t sit on the sidelines—investing in equities has always been preferable to running scared. According to a Schwab Center for Investment Research study that reviewed investment patterns from 1926 to 2005, holding solid stocks over a 20-year period has never produced a negative result.

Acting impulsively may offer short-term relief but it’s just as likely to produce long-term pain. Consult a professional and take the proper steps to get your finances back on track. I guarantee that mapping out a comprehensive financial plan will remove you from the ranks of the desperate and position you for a comfortable retirement.

This article originally appeared in the September 2009 issue of Black Enterprise magazine.

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