Saving for a seemingly far-off event like retirement can be difficult, and many people find themselves getting a late start. Saving for retirement is even harder for people of color, who tend to have lower incomes and are significantly more likely to provide financial help to family members.
In addition, according to an AARP study, more than 53% of African Americans and 64% of Hispanics lack access to a workplace retirement plan. Consequently, people of color tend to find themselves in the position of having little to no retirement savings in their 50s or 60s. The outcomes are worrisome.
But difficult doesn’t mean impossible. With a sound retirement strategy, you can still retire, even if you start late. Below are seven tips to help you catch up on your retirement savings.
1. Estimate how much money you need to retire
The 2022 BlackRock Read on Retirement Report showed that 75% of African Americans, 67% of Hispanics, and 71% of Asians worried about outliving retirement savings as opposed to 61% of White respondents. Estimating how much you need in retirement can help you figure out how much you need to save.
To do this, you’ll need to estimate all sources of future income [401(k)s, pension, Social Security, etc.] and subtract the amounts from your future expenses when you are retired, such as estimated housing, transportation, healthcare, and travel costs.
Of course, this involves some guesswork, but one common rule of thumb is to try to save 10 times your salary if you want to retire by the conventional age of 67. When coming up with an estimate, be sure to take important factors into account like cost of living increases due to inflation, and whether you plan to move somewhere less expensive to make your retirement savings last longer.
Tools like retirement calculators can help you get a more accurate estimate by incorporating some of these factors. Your retirement plan provider likely offers one or you can find one online.
2. Maximize company match
A company match is the percentage of your retirement contributions that your employer matches. Most workplace retirement plans offer some sort of match, typically up to 6% of an employee’s pay, according to a Plan Sponsor Council Of America survey.
A recent study by T.RowePrice revealed that African Americans and Hispanics are less likely to participate in a retirement plan, and those that do are not taking full advantage of company matches, which results in less money saved.
If you are planning for retirement late, it’s even more important to participate in your workplace plan, especially if they are offering a company match. It may not seem like much, but compounded over time, the company match can effectively double the rate of your contributions, depending on how much you are putting in. In addition, the money you contribute is taken out pre-tax, which will help reduce your tax bill.
3. Take full advantage of catch-up contributions
A study from Investopedia showed that the median retirement savings for White and Asian households between ages 25 and 61 is $79,500 and $67,025, respectively. For Black and Hispanic households, the median retirement savings is $29,200 and $23,000, respectively. If you’re 50 or older and find yourself in the median range, check whether your employer allows catch-up contributions.
The additional amount that people 50 and older can contribute changes yearly. For 2022 it’s $6,500, and for 2023 it’s $7,500. The extra amount can go a long way to help you catch up on your retirement savings.
If you are struggling with the thought of adding thousands of dollars to your retirement plan,
4. Use your employer’s auto-escalation feature
there are other ways you can increase your retirement savings. Many employers offer “auto-escalation,” which allows employees to pre-set a specific increase of their contributions by as little as 1% annually.
If you do this, you might not notice the difference in your paycheck; if you find yourself missing the money, you can always readjust your contributions.
Another common strategy is to increase (or at least evaluate) your retirement contributions every time you get a raise.
5. Review your 401(k) investments
You work too hard for your money to have it sitting around in a 401(k) plan doing nothing. On average, African American and Hispanic workers are less likely to invest, which means they may be leaving retirement assets in low- or no-growth options like a money market fund.
For many, picking a 401(k) investment option can seem overwhelming, but investing has become significantly more user-friendly over the last couple of decades. Below are a few examples:
Target-date funds can help many take the guesswork out of how to invest for retirement. It’s a mutual fund made up of a diverse mix of investments designed for someone retiring at or near the date of the fund. As you age, the fund rebalances, growing more conservative (investing in fewer equities) over time. You’ll typically see a target date fund expressed by year, such as 2040. This means the fund is designed for someone retiring in or near the year 2040.
An index fund is a fund made up of investments similar to a particular financial market. The name of the fund tells you the financial market they are replicating. For instance, an S&P 500 index investment will be similar to the S&P index, which represents 500 of the largest companies in the US.
Remember that investing isn’t free; each investment incurs a fee. So before investing in a cool new fund, be sure to ask for the expense ratio, which should be under 1% at the most. An expense ratio represents the cost funds charge investors to cover managing the fund. The expense ratio is typically expressed as a percentage. This means if your expense ratio is 1%, then for every $1,000, you’re paying $10.
6. Re-prioritize your spending
Another way to contribute to retirement savings is to reduce your current spending. That means thinking twice before upgrading your car or home and considering downsizing so that you are spending less on housing and transportation costs. It might also mean having tough conversations with any adult children or other family members you support financially. Taking care of yourself in retirement requires putting yourself first at some point.
7. Take action today
Making it to one’s 50s without savings can feel like a moral failure. It’s easy to procrastinate and say you’ll start saving more of next week’s paycheck. But the psychological benefits of knowing you have a growing nest egg are hard to overstate. Money saved for retirement means choices in when you can retire, where you choose to live, and the activities you can do while in retirement. The best time to start saving may be when you are just starting and have a lifetime of raises and advancement ahead of you, but the second-best time is now.
"If we’re not helping all employees of color earn more, invest more and develop genuine autonomy, we’re not uplifting disenfranchised communities. The financial health of marginalized workers is critical to achieving equity and creating a productive and engaged workforce."
Founder of OfColor