Nest eggs are supposed to be there for when you retire. But it seems that many African Americans are dipping into their retirement savings prematurely. According to a new study, Blacks are more likely to withdraw money from their 401k plans before they retire. The study, done by Aon Hewitt, the human resources division of Aon Corp., and Ariel Education Initiative, a nonprofit affiliate of Ariel Investments, LLC., found that withdrawals were based on hardship.
“Generally speaking Blacks have not been able to save a rainy day fund. The only fund they seem to have is their retirement, when an emergency arises the retirement is the easiest to access,” says wealth management coach Anita R. Johnson, Anita R. Johnson & Associates.
Blacks, according to the study, were withdrawing from their retirnement account even though there are heavy tax consequences and penalties for withdrawing money before age 59½. In fact, nearly one out of 10 — or 8.8 percent — of Blacks borrowed against their plans. This is compared to 3.2 percent of Latinos, 1.7 percent of whites and 1.2 percent of Asian-Americans who did the same.
“The recession was a major reason many people had to dip into their retirement accounts to meet living expenses,” explains Gayle M. Gilmore, author of How Would Jesus Invest? Breaking the Poor Man's Mentality. “Other reasons have included paying college expenses and paying off other loans. A lot of times these retirement funds are more accessible than other types of funds. The major downfall, however, is the tax penalty of, usually, 10 percent. Many people do not realize that this money is added as taxable income.“
Johnson agrees. “If the person has not reached retirement age, taxes are deducted from these funds as well as a 10 percent penalty fee,” she notes. “Another disadvantage is this puts the person two steps behind in investing in their retirement. More that 50 percent of Blacks depend more heavily on government-sponsored retirement programs than other assets such as annuities, homes and IRAs.”
There are alternatives to dipping into a 401-k when money problems arise, says Johnson. “If lines of credit or savings is not available, then borrowing from family (with a re-payment plan) could be an option. If you can invest 3 percent of net income into an emergency fund, then anyone could be on their way to an emergency fund,” she explains.
Adds Gilmore, “Personal loans may be a better option. Even a home equity loan may be more beneficial since the interest can be used as a tax deduction.”