Wall Street–the best address

Why your home shouldn't anchor your retirement plan

for 20 years at the historical rates of return of 5.5% and 11.4%. The real estate investment grows to $438,000, while the stock market investment balloons to $1.3 million–a difference of close to a million dollars.

After making such great strides in terms of breaking into the middle and upper classes, I worry that too many of us will retire into poverty simply because we did not save enough through stock market investments. There’s definitely a basis for this concern. Last year, only 64% of African American respondents to our survey identified themselves as stock market investors, compared with 83% of whites.

Even more startling is the size of the savings gap. On average, African Americans with at least $50,000 in household income have $59,000 earmarked for retirement while whites at the same income level have socked away closer to $93,000. At a glance this difference may not seem alarming, but over time, with compounding, it becomes a gaping hole.
Not only do African Americans invest less, but our community often makes conservative choices, such as savings accounts and money market funds, that offer much lower returns than the stock market. So assuming blacks invest conservatively for 25 years, with an annual return of about 4%, the $59,000 retirement account noted above will grow to $157,000. By contrast, whites who invest $93,000 in mutual funds at an annual return of 8% over 25 years would end up with a retirement account closer to $637,000. That is a difference of $480,000. As you can see, this is not a story that gets better with time.
I know many members of our community steer clear of Wall Street because of the perception that the stock market is risky, but I am convinced the biggest risk of all is not taking one. To be clear, I am in no way recommending that people forego homeownership–but it should not be the anchor of a retirement plan.

Mellody Hobson is the president of Ariel Capital Management L.L.C./Ariel Mutual Funds, a Chicago-based mutual fund company and money management firm. She is also a regular financial contributor for ABC’s Good Morning America.
To download the 2006 Black Investor Survey, visit www.arielmutualfunds.com or www.aboutschwab.com.

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