Most RIAs are well aware of the racial wealth gap in the United States, and many wonder how we can harness our expertise to support our clients who are seeking to heal from the past and protect themselves from the present and future of this lived reality. It’s a tough discussion to navigate. A good first step is to listen to individuals’ stories, confront the data and commit to learning.
Many African-American financial advisors, myself included, are already trying to close the racial wealth gap in the United States. This means improving the wealth outcomes for their client base of African American families, especially those whose ancestors were once enslaved and those continuing to suffer from wealth disparities today because of 100 years of systemic discrimination and racism following emancipation.
Disparities in housing, healthcare, education and business development (through lending and contracting) are still apparent in 2023 because of discrimination that was set in motion more than a century ago. Wage inequality also has a direct impact on retirement security by lowering retirement savings and Social Security benefits. Yet approximately 38% of minority beneficiaries rely on Social Security for 90% or more of their income, compared with 28% of White people, according to the Social Security Administration.
And having less retirement income doesn’t necessarily reduce one’s expenses during retirement. In fact, it may increase expenses, especially if credit card debt is accumulated to bridge the income gap.
Connecting the dots
According to the Economic Policy Institute, nearly seven in 10 (68%) White Americans between the ages of 32 and 61 had money in a retirement account in 2016, up about 1 percentage point from 2007. Comparatively, 41% of their African American peers in that age bracket had retirement-account savings in 2016, down from 47% in 2007. That means about 6 in 10 African American families had nothing saved for retirement — at least not in employer-sponsored accounts such as 401(k) plans or in individual retirement accounts, as the EPI defined these savings.
You may be familiar with the statistic that the median African American household in America has around $24,000 in savings, investments, home equity and other elements of wealth. In contrast, the median White household has $189,000. What this means is that African American families are statistically less equipped than White families to handle unexpected expenses, healthcare challenges and life emergencies.
African American families also have a tougher time attaining intergenerational social mobility. In fact, in recent years, the median wealth disparity has been getting worse, not better.
It’s fair to say that African American who are nearing retirement have more, not fewer, challenges to overcome. In fact, I can attest to this personally, as a 55-year-old African American male, who happens to own an investment advisory firm.
Wage inequality, redlining and financial literacy
In my teenage years, I had to contend with wage inequality. As an adult, I also faced discrimination when I was in the market to purchase my second home, in 2003.
At that time, I was informed that the only mortgage I qualified for was “sub-prime,” although my credit score was in the mid-700s and I had slightly more than $250,000 in non-retirement savings. Before I was able to refinance my mortgage, my monthly mortgage payments were significantly higher than what they would’ve been if the mortgage company I was dealing with at that time hadn’t engaged in redlining.
And my ancestors faced even worse financial discrimination.
Many formerly enslaved persons who left plantations with just the clothes on their backs had no choice but to return as sharecroppers for hire. They were also required to rent practically everything they needed in order to farm, including shelter. Many were unwittingly steered into leveraging the future value of their harvest and often the landowner (who was usually the former enslaver) would resort to unethical, as well as physically violent tactics to ensure that the sharecroppers would end up in debt at harvest time.
My great-grandfather, the Rev. Daniel Lewis McClure (1880 – 1949), a traveling minister of the Gospel of Christ, helped establish churches, some of them in barns. As an educated African American man, he also set up an accounting system and taught sharecroppers how to properly account for their harvest and money. This enabled them to protect themselves from being taken advantage of or swindled out of their harvest by their former enslavers and landlords.
My great-grandfather’s early work in financial literacy put him and his entire family’s lives at risk. Word spread quickly that Rev. Daniel McClure was teaching sharecroppers about money matters, and angry landlords began to search for him to do him harm or worse. He was forced to relocate his entire family often. But thankfully, he remained faithful to the call of the ministry and continued to advocate for economic equality by providing financial education.
Nearly 70 years later, African Americans were excluded in many respects when the New Deal came out under Franklin D. Roosevelt. For example, domestic workers, many of whom were African Americans, couldn’t benefit from Social Security. Redlining prevented African Americans from obtaining a mortgage to purchase a home. In addition, African American servicemen and women were excluded from the GI Bill after the world wars.
When it comes to retirement, there’s not really a separate rule of thumb, or advice that is better suited for African Americans vs. non-African Americans. Many people who are not wealthy are in the same boat, financially speaking, irrespective of their racial demographic. For example, poverty is poverty. The primary difference is usually how they arrived there.
I believe the first thing that advisors should do to assist older African Americans is to educate themselves about the historic socio-economic plight of African Americans. Systemic racism has had and continues to have a detrimental impact on individuals of all wealth levels and cannot be ignored.
Second, it is important to counsel clients to strive for total debt freedom. My firm’s African-American clients of retirement age tend to be in a strong position, financially. They carry little debt relative to their income and assets. They have saved well over the years and many are 10 to 15 years away from paying off their mortgages. While this is good for my clients, this isn’t the reality of African Americans as whole.
I have not offered any type of debt consolidation services to my clients. If they had debt, they resolved this on their own. However, I believe financial advisors should coach all their clients, especially African Americans, to strive to be 1) mortgage free, 2) debt free and 3) stock-market free by the time they retire.
The first two recommendations are self-explanatory. What I mean by the third recommendation, being “stock-market free,” is being free from having to take investment risks with retirement funds to fuel future income during retirement.
I help protect clients from inflation by diversifying their portfolios by asset class (e.g., small-cap value and growth, mid-cap value and growth, large cap value, real estate, bonds, international and commodities) and then disproportionately “weighting” the percentage allocation of each model based on where the economy is and where I see it heading.
Annuities can help, too
Annuities can also be used to overcome the negative impact of inflation. However. It’s important to understand that all annuities are not created equal. For example, a variable annuity whose funds invest in mutual fund sub-accounts can experience market losses although the principal (the insurance aspect of the annuity) may be protected for income-tax purposes. Furthermore, variable annuities tend to have high fees and expenses.
A fixed income annuity (FIA) can also aid retirees who may be concerned about erosion of their retirement income. Unlike a variable annuity, an FIA is less likely to suffer a loss if its index underperforms in a particular year. Although annuitants may not accrue interest on their principal, some FIAs will credit a base percentage (usually between 1% and 4%) to the fixed account within the annuity. But for some annuities, the interest credited to them could exceed more than 100% of the index’s performance. This is known as its “participation rate.” I have seen participation rates between 125% and 300%.
What if there’s a sharp market correction, recession or another event that impacts the market like the Great Recession, or the pandemic? I ask my clients if their portfolios can sustain a loss of up to approximately 25% to 30%, especially when their future income during retirement relies on the continued growth of their assets. Again, assets in a fixed index annuity can still experience growth, without the added risk of the market. A client’s preferences and personal financial circumstances help me determine whether it’s suitable to recommend a fixed index annuity for their retirement nest egg.
Taxes and more
My role as their financial advisor is to focus on building model portfolios and providing investment management services. This may include utilizing income-producing investments, such as bonds and fixed index annuities that offer a lifetime income guarantee, etc.
Like my great-great grandfather, we also need to teach financial literacy. I was the second person in my family to own any mutual funds. My mother was the first: She started investing in her employer-sponsored retirement plan when she was in her mid 40’s.
It’s also important to help clients understand the long-term impact that taxes will have on their retirement income. We need to help them evaluate whether it will make more sense for them to pay taxes now or later.
For example, should clients plan to pay annual taxes on required minimum distributions or at say, age 60 pay a large amount of taxes upfront so later distributions will be tax free? This can be accomplished by converting a traditional IRA to a Roth, or by transferring funds from a 401(k) or IRA to an Indexed Universal Life insurance policy. IULs allow the policy’s cash value to be borrowed tax free. The policies also offer interest on the cash value based on the performance of an index. Although there may be an upper and lower limit on returns, the cash value is protected from losses even when the index goes negative.
These are just a few ideas on how advisors can help African Americans be better prepared for retirement. Advisors who want to help African Americans need to understand how we exist in the world beyond just a number, such as assets under management.
Martin A Smith, a 25+ year veteran of the financial services industry, is the founder and president of Wealthcare Financial Group, Inc. He and his younger brother, Daniel J. Fountenberry, conceptualized and launched two fintech startups to help close the racial wealth gap: HBCU Legacy LLC and Wealth Village. HBCU Legacy, LLC is a digital investment advisor (i.e., “robo-advisor”) serving the investment needs of a global alumni community of historically African American colleges and universities graduates.