Unique Retirement Planning Challenges Facing Hispanic Americans
February 19, 2014 by Jamie Hopkins
While many Americans have some difficulty planning and preparing for retirement, unique challenges face certain demographic groups. One such group is Hispanic Americans. A new study released by Prudential Financial PRU +1.63%, entitled “The Hispanic American Financial Experience,” sheds new light on the distinctive challenges facing Hispanic Americans as they plan for retirement. With an estimated 53 million Hispanic Americans in the U.S.—roughly 16.9 percent of the U.S. population in 2012—it is paramount that Hispanic Americans and the financial professionals who service them understand the unique challenges presented, the opportunities available, and the solutions best tailored to suit the needs of this particular group when planning for retirement.
Hispanic Americans are confronted with a variety of challenges when planning for retirement.According to the Prudential study, Hispanic Americans lag behind the general U.S. population in both total financial assets and workplace retirement benefits. This means that with less assets saved for retirement, Hispanic Americans will rely upon Social Security for more of their retirement income than the general population.Consequently, any changes resulting in a reduction in Social Security benefits would hit Hispanic Americans the hardest.It also means that making decisions that maximize Social Security benefits become more critical to retirement security. Deferring benefits offers the ability to increase the amount of income replaced and better addresses the risks of living too long and inflation.
Furthermore, this gap in retirement savings is unlikely to change anytime soon as Hispanic Americans have less access to employer-provided benefits and contribute less to such plans when they are available (71% of Hispanic Americans as compared to 85% of the general population). This disparity can be explained, in part, by Hispanic American attitudes towards retirement savings. As the Prudential study noted, Hispanic Americans rate saving for retirement as a much lower priority than the general population (53% of Hispanic Americans as compared to 62% of the general population rate saving for retirement as a top financial priority). Instead of focusing as much on retirement savings, a higher priority is given to shorter-term financial goals such as reducing debt.
However, despite having fewer financial assets and retirement benefits, Hispanic Americans exhibit a higher level of financial confidence as compared to the general U.S population.While at first glance this figure seems to suggest overconfidence, it could indicate a variety of cultural and other factors at play. For example, if Hispanic Americans picture a different retirement than the general population, they will also need a different amount of assets. Therefore, this higher level of financial confidence might not be overconfidence but rather show that Hispanic Americans, while lagging behind the general population in financial assets, are confident they can achieve their financial goals.However, both the general population and Hispanic Americans could benefit from an increase in financial confidence. Increased retirement and financial education coupled with more financial planning could help improve financial confidence and retirement preparedness. Taking the step of calculating how much needs to be saved for retirement with one of the freely available programs on the web would be a good start. It would also be helpful to better understand the reasons for differences in financial confidence to be able to craft better solutions for Hispanic Americans.
Another take away from the Prudential PUK +2.85% study is that Hispanic Americans need to make saving outside of employer plans a priority. Hispanic Americans tend to be employed with companies that offer less access to retirement savings plans. This means that starting to save early through other types of tax-advantaged retirement vehicles, such as IRAs or Roth IRAs, is crucial to a secure retirement. Roth IRAs offer the flexibility of being able to take withdrawals of contributions to the account without tax consequences, making it easier to decide to contribute to a plan. Additionally, the newly announced myRA may provide working Hispanic Americans without an employer-sponsored retirement plan a relatively inexpensive way to start saving for retirement, as initial deposits could be as low as $50 and additional payments could be made at $5 increments through payroll deductions. While IRAs and Roth IRAs are effective vehicles for saving more money overtime, the myRA may be an effective way to get started.
One positive sign, for purposes of retirement planning, is that Hispanic Americans plan to work to age 66, much longer than the average retirement age of 62. Additionally, many plan to work part-time in retirement.Working longer can help improve retirement security in many ways including:
- Providing the financial means for deferring Social Security benefits
- Continuation of employer-provided health insurance until Medicare becomes available at age 65
- Reducing the costs of retirement by shortening the retirement period
Studies have also shown that working longer may even improve health. Furthermore, many studies show that working part-time in retirement can help alleviate some financial strains and improve the retiree’s quality of life. The limitation of planning on working longer is that for some it may not be feasible due to health reasons or lack of employment opportunities.
Another area of concern facing Hispanic Americans is the overall lack of assistance from financial planning professionals. According to the study, “[w]hen compared to the general population, Hispanics are half as likely to currently have a professional financial advisor and significantly less likely to have been contacted by a financial advisor.” This is discouraging because individuals with well-developed plans are significantly more prepared for retirement. As such, Hispanic Americans should consider working with a financial advisor when planning for retirement. Financial advisors can help provide strategies for maximizing Social Security, transferring personal financial assets into retirement income, and creating a comprehensive retirement plan.
The bright side for both financial planners and for the Hispanic American community is that the study found that they are “equally likely to work with a financial advisor, if contacted.” This provides an amazing opportunity for financial advisors and retirement planning specialists to reach out and assist Hispanic Americans in planning for the unique retirement challenges they face.
