LatinX Wealth: reserves, investments and retirement

After discussing Latinx entrepreneurship and projections for the future, diving into real estate, and presenting the LatinX community in its impressive numbers, we are back to talk about how we deal with money.

Since the goal of the Hispanic Wealth Project is community development via housing, small business development and wealth building, part of the research is focused on reserves and investments.

Latinx and retirement accounts

Latinx people with retirement accounts have an average net worth of $133,300, nearly 10x the wealth of those without. This is an essential investment in wealth building, which is why it is such an important area to research and explore.

Because it is a stock market-based investment, a lack of understanding of how it works is the main reason for a low commitment to retirement plans. The stock market has a “boogeyman” effect on the working class, and some people end up losing money because they think they are incapable of learning.

Of survey respondents, 25% of Latinx people reported not knowing how to invest in retirement accounts, 10% do not believe in investment safety, and 9% have never heard of it at all.

Although a lack of knowledge about investments is one of the main reasons listed for not participating, 25% of Latinx people responded that they could not afford to, even less than 40% of non-Hispanic White people. In other words, this is more of a cultural issue than a financial one.

As if the historically low participation rate were not enough, between 2016 and 2019, Latinx people reduced their participation in retirement accounts by 14.1%, continuing the trend of having the lowest participation rate among the groups studied.

Ability to save:

In 2019, 44.7% of Latinx families reported that they were able to save, compared with 58.6% of the general population. Among 2021 Survey respondents, 39% of Latinx people have less than $1,000 in savings.

Education as means of building trust

Much of the distrust in not participating in investments stems from cultural issues and lack of information. Latinx people have little asset diversification, leading Latinx companies to take more losses during the pandemic. We saw this data in our post on Latinx entrepreneurship.

In 2019, 25.5% of Latino families had a retirement account, the lowest rate of any demographic group, and by a large margin. Despite the significant growth in business and in real estate, the economy and investment sector is not seeing the same trends in the Latinx world.

But we do see a light at the end of the tunnel! Education and guidance have the power to change this culture (or any other!). During the survey, it was found that 18% were likely to learn about retirement with family members or someone they trust, with a lower percentage willing to learn from workshops, whether in person or virtual.

Investments and retirement

As we have already said, the investments of the Latinx population are not very diversified and when we talk about the stock market, the participation among members of this community is even smaller. Through research, we can identify some possible reasons:

Latinx people prefer physical investments that are tangible and can be intuitively understood.

Latinx people’s perception of retirement differs from non-Latinx people and almost always can be explained by socioeconomic factors. Educational achievement, home ownership, business ownership and income all play roles in the willingness of a Latinx family to participate in investing.

The fact that participation among Latinx people in retirement accounts has decreased by 14% is concerning. Retirement not only brings tax advantages, but also provides financial safeguards, diversifies assets and benefits from compound interest.

Furthermore, relying entirely on Social Security can be risky, as benefits tend to become insufficient and less reliable over time to maintain a reasonable standard of living in old age.

And this concern is not individual; if future retirement savings rates remain constant, the Employee Benefit Research Institute predicts that nearly half (48%) of Latinx people aged 35 to 39 today could run out of money in retirement.

Socioeconomic factors

Pointing once again to the fact that education and real estate ownership are habit-transforming tools, these are factors that influence and drive participation in retirement accounts.

Among those surveyed, 67% of Latinx people with a bachelor’s degree or higher and more than half (51%) of Hispanic owners own and invest in a retirement account. Likewise, among the wealthiest Latinx, 71% of respondents who earn $100,000 or more annually reported having a retirement account.

However, even among those who have access to employer-provided retirement accounts, Latinx people are the most hesitant to participate. Access to sponsored retirement accounts is less likely for the Latinx in general. However, even when given the option, they are the least likely to participate. Only 44% of Latinx families have access to a retirement plan, of which only 75% contributed, having the lowest membership among the other groups studied.

Cultural Perceptions and Expectations for Retirement

Some factors that should be taken into account when considering Latinx retirement in the US. are culture, habits and customs, which speak a lot about this portion of the population.

Here is some relevant information to better understand the Latinx population:

Working during retirement

Of the entire population, Latinx represent 15% of those who do not intend to retire or permanently stop working, 50% more than the general population. It is believed that cultural issues related to family support, precariousness of work, pride in working and the concept of what a retiree is, are largely responsible for this trend.

This is most common among Hispanic tenants (21%) and Hispanic tenants under 35 (19%). The answers suggest a certain aversion in this group to the idea of retirement.

Beware of elders

Latinx in general are more attached to the family unit and, often for economic reasons, they tend to live together in the same house at different stages of life. Thus, 41% of Latinx respondents believe they will have to support their parents (or grandparents, great aunts and uncles, etc) during their retirement.

On the other hand, 70% of non-Latinx White people do not expect to have to take care of a parent until retirement.

In the same vein, Latinx people were the demographic group most likely to expect the majority of their retirement funds to be provided by their children, at twice the rate for the general population.

Mistrust and unfamiliarity are leading to low investment participation

The main driver of low retirement account participation for Latinx people is not a lack of funds but a lack of understanding of how stock market-based investments work.

When asked about the reasons for not investing in retirement, Latinx were the most likely to respond that they do not know how to invest (25%), that they think it is not a safe investment (10%), or that they have never heard of it (9%) compared to non-Hispanic White respondents.

Less ability to save

Most Americans, like Brazilians, use traditional savings to keep their money, even if they later make some investment with it. These savings often support a person’s lifestyle when there is financial instability.

Just as the Latinx retirement-planning trend is alarming, the savings trend is not far behind. According to the Consumer Finance Survey, Latinx people report having the lowest saving ability of any demographic group.

In 2019, only 44.7% of Latinx households managed to save something, compared to 58.6% of the general population, a rate that is consistently the lowest since 2010. The average reserve value of families that managed to save is only greater than that of Black families.

During closures and travel restrictions in 2020, most American homes reported an increase in their savings. The lack of ability to travel, attend social events, and go to restaurants, allowed for money to spare.

However, for the poorest population, such as the Latinx (42%) and the Black population (44%), this period only made financial life more difficult and the economy became even smaller than in previous years.

Compound interest

Latinx who have the ability to save a little extra money choose to just save it and keep the money in interest-free accounts, such as savings accounts or even outside the banks, keeping them at home or in safes. The custom of putting money under the mattress, you know? 47% of respondents keep extra money in their bank account.

Even when it comes to business owners, Latinx entrepreneurs are 3x more likely than non-entrepreneurs to report keeping extra money at home (35% versus 11%).