Why saving for retirement is hardest for Latinos



Salvadoran immigrant Obdulio Hernández, now a U.S. citizen who lives in South Central Los Angeles with his wife and two daughters, has worked steadily since he arrived in the country 17 years ago. He has some savings for emergencies, but has never saved for retirement.

image“I don’t trust that my money will be there for me at the end,” says Obdulio Hernández. “I’m afraid of the risk. What if the company goes bankrupt? Then I’ll have nothing!” he exclaims. “Maybe if I understood how the plan works, I’d be willing to invest,” he says referring to retirement plans.

He’s not alone. Thousands of first-generation Latinos in the country don’t understand the concept of financial planning for retirement. Fear, distrust of financial entities, and lack of financial literacy contribute to the problem.

Unemployment and the economic recession has also taken a heavy toll on this community. Dreams of financial success – or even sustainability – seem to be further and further away for millions of minorities who can barely make ends meet.

The harsh reality is that Hispanic households suffered the biggest drop in wealth of any ethnic and racial group in the country during the recession.
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According to a Pew Research Center study, on average, their wealth fell by 66 percent. African-American households also suffered a big setback – a 53 percent drop in wealth from 2005 to 2009, the most recent data available. White households, however, only experienced a 16 percent drop in wealth during the same period.

This drop in wealth means there’s less money earned and less money saved. That makes it harder for anyone to think about saving for the future. It’s even harder for many Hispanics, who are less likely to have employer-sponsored retirement plans (such as 401(k)s, because they work in service jobs or small businesses that don’t offer them to their employees.

Hernández, for example, works as a sign installer for a company that hires him as a subcontractor. He gets no health insurance or retirement plan options through his employer. He admits he’s concerned about his finances “cuando esté viejo” – when he’s old.

“I don’t think Social Security is going to be enough for my wife and I to survive,” he worries. But even though he recognizes the need, he’s still hesitant to take the first step in retirement planning. “I think it’s cultural,” he says. “Back in El Salvador, you just don’t think about saving for old age.”

imageFor those Latinos who are fortunate to have employer-sponsored 401(k)s, many don’t participate in the retirement plans or don’t save enough, and some who do, make mistakes that can cost more than they bargained for.

“Latinos stash their money in 401(k)s and then take it out before they’re supposed to,” says expert Julie Stav, who specializes in financial issues and literacy in the Hispanic community. “In doing so they end up paying penalties and fees. The moment you put money into a retirement account, you can’t touch it.”

An Ariel/Hewitt study shows 50 percent of Hispanics with 401(k) accounts were more likely than whites to take hardship withdrawals from their plans.

It may be a tempting proposition to tap into your retirement savings if you’re unemployed, but pulling money out of your 401(k) before age 59-1/2 means you’ll have to pay income taxes plus a 10 percent penalty. Any advantage gained in your investment will be lost.

This is the first in a series of stories on the importance of retirement planning. In part two, we’ll address the problems the immigrant Latino community faces in saving for retirement. Throughout the series, we’ll be providing savings advice and retirement planning tips from expert Julie Stav.