The Black Middle-Class Financial Crisis and Retiring Broke

The Neighborhood Finance Guy writes about financial literacy topics: Financial Planning, Budgeting, Boomers to Millennial Money Management, Investment Strategies, Retirement tips, and more. The goal is to help you make effective decisions and set S.M.A.R.T goals with your money. The information is free but the struggle is not sold separately. And if you are into this sort of thing; the blog is PLUTUS nominated, I studied Accounting with a Specialization in Taxation, served in the US Marine Corps, and now work as an Auditor.

Summary:

Middle-class U.S. households have limited financial reserves and may face retirement insecurity, according to the National Institute on Retirement Security.
Particularly, financial asset ownership is highly concentrated among white households. In 2019, White households owned three-quarters or more of their generation’s financial assets.
In 2019, middle-class baby boomer households had median assets of $51,700. Compared to White median financial assets, Black and Hispanic families held less than 54% and 39%, respectively.
As such, minority households and communities are highly dependent on social security and Medicare to subsidize their retirement.

Table of Contents

When White America catches the Flu, Black America catches COVID

Research finds that the economic inequality and racial wealth gap continue to grow. Black and Hispanic Boomer households own barely 5% of the total financial assets for their age range. See graphic #1.

Going into 2020, these Middle-class households had limited financial assets. Households are either consumer debt-heavy or merely struggling to manage their income as expenses continue to climb with inflation.

Most Americans do not finance their retirement through the ownership of 401ks, IRAs, or other defined-contribution accounts. Social Security remains the primary source of retirement income for the majority of Americans.

Some as much as eighty percent.

The pandemic pushed remote-work capable industries to modernize and downsize office space costs. Unfortunately, this came with the death of small businesses such as coffee shops. This disparity in the mean of production created an uphill battle for minority communities who often serve as the 3rd shift.

Minority Boomers, in the later stages of their careers, were left with few choices. Either work until your body gives out, or work until you retire to the couch.

Why are Black Households Drowning while Broke

According to the 2019 data from the Federal Reserve’s Survey of Consumer Finances, middle-class Boomer households had a median net worth of $236,350.

Using a simple straight-line withdrawal, Boomers can scarcely pull out $9,454 per year, or $788 per month. Added to the average social security benefit of $1,543 per month (as of January 2021), the average retiree can plan on living on less than $2,500 per month.

If that seems doable, just remember to account for inflation and taxes. It boils down to asking people to survive on no more than $25,000 annually. On top of that, financial experts never accounted for the increase in indebted retirees.

Subsequently, Black and Hispanic median net worth for the over-50 age group trailed at $53,800 and $111,500 respectively. Black retirees will have to fight uphill with as little as $1,750 per month. I’m not even going to mention the lingering mortgage debt and parent-plus loans.

Forget the Retirement Car, Travel, and the Home Renovations

Based on the subsection of median wealth, Middle-class Black and Hispanic baby boomers had median assets of $30,900 and $22,280, respectively. Effectively, large retirement expenditures are off the table.

Seismic spending on a new car with payments, large renovations in the home, and travel are likely all off the table. Minority Gen Xers and Millennials should be vigilant and weary since any of these purchases would be catastrophic in the long term.

Intergeneration family finances and planning are critical. These will be mandatory for some families since healthcare costs tend to capsize any chance of building financial stability.

“Boomers will have to contend with downsizing their homes,” says Financial Education coach Alainta Alcin.

She went on to say that the recent housing price surge, presents a unique opportunity for a family to either re-purpose as a rental property or even sell outright.

Families should use this opportunity to consider moving in with each other to lower generational expenses. On top of that, light fixes and some renovations can open the door for passive income from rentals going forward. It’s that families might need to flat-out sell their old home to support their retirement income.

Sorry to Tell You the Bad News, This will get worst and won’t get better

Boomers are effectively retiring broke and the next generation isn’t doing so well either.

Although Middle-class Gen Xers have some time before retirement, analysis shows that they are likely on the same track. With less time than millennials to accumulate wealth, the clock is ticking and the window is getting narrow.

Millennials aren’t doing any better.

With terms being thrown around like the Great Resignation, many are bluffing with an empty hand choosing to quit in hopes of forcing companies to cater to their demands. Some will gamble and grow rich. However, more people will find that 11 months of being unemployed and burning through savings, is less winning, and way more depressing.

Many are making decisions and taking financial risks that don’t align with their long-term financial health. Avoid the Millennial mid-life crisis by building your financial plan early. A plan that helps you grow and live up to your goals.

White Wealth by Inheritance, Black Boomer Debt by Default

Intergenerational wealth allows some families a second wind.

These transmissions can be provided inter Vivos, for example, by providing a down payment for a home, or car, or even paying for a wedding. It’s estimated that nearly 45 million U.S. households will transfer more than $68 trillion over the next 25 years, according to Cerulli Associates.

While Black and Hispanic families are more likely to provide support for their aging parents and extended family, white families can expect to receive as much as $50,000 per household. Ultimately, White boomers represent a large segment of investments and homeowners.

All of that money will give debt-burdened white millennials a much-needed boost in their 40s.

Making Adjustments Today to Help Black Households Tomorrow

First, Americans are simply not saving enough.

When the financial experts stated that 10% is a safe bet, the average person took it as gospel. Savings rate is near 8% and most consider that they were doing more than the average. In truth, it’s quite the opposite. Less than 40% of Black households are investing.

Save and Invest as much as possible should be your new motto. It doesn’t mean you won’t live. I’m saying you don’t have to spend every cent that comes into your checking.

Here are 10 families that are breaking financial generational curses.

Secondly, Americans aren’t using their benefits.

Most households are unclear about their workplace retirement plans. 17% with access to employer accounts, such as 401k, 403b, or 457b, don’t contribute. Of those who participate, 17.5 million savers don’t contribute to getting their company’s match.

Worst yet, if the employer isn’t offering a plan, most don’t save at all. Financial literacy classes need to be broadcast and available every Saturday in your community.

Thirdly, Boomers need to catch up.

While 401, 403b, and 457b maximum contributions are set annually at $19,500 (2021) and likely $20,500 (2022), people over 50 can add an additional $6,000 (or $6,500 respectively). Additionally, you can also add to a Traditional and/or ROTH IRA for $6,000 (2021) with a catch-up of $1,000 for anyone over 50.

“Retirement doesn’t have to be hard if you start early and if you never stop learning,” Alainta said.

Finally, Americans need financial planning.

In earnest, you have to start talking about the family plan sooner than later. That plan isn’t just life insurance. Think of it as instructions in a serious relay race in which you set up the next person to run their relay. Case in point, less than 25% of African Americans have amassed more than six months of savings.

It’s abysmal.

Sure the other guy might have a head start and maybe he or she might be more athletic, however, the goal of the relay race is to run your segment. And to run with no regrets.

Start talking about retirement with your family today. It’s less sexy to retire broke and without a plan.

“Someone has to lay the first stone.” Jean Baptiste Point Du Sable Mural in Chicago

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