Next Generation Planner: May 2022
Rodney A. Brooks is the former deputy managing editor at USA Today. His columns appear in U.S. News and AARP’s SeniorPlanet.com. He has written for National Geographic, The Washington Post and USA Today. Brooks’ third book, Fixing the Racial Wealth Gap, Racism & Discrimination Put Us Here, But This is How We Can Save Future Generations, was released in October 2021. He has testified before the U.S. Senate Special Committee on Aging on challenges facing Black Americans, particularly women, in retirement.
Segregation and discrimination in all areas of American life have made accumulating generational wealth a challenge for many Black Americans. Those issues are a big reason for the racial wealth gap, which has been exacerbated by two years of the COVID-19 pandemic that has had an outsized impact on health and finances of many people of color.
Black Americans will, thus, be left even further behind than they were when we started this perilous pandemic journey.
A brief look at some of the numbers.
- The average wealth of a White family is 10 times that of a Black family—$171,000 versus $17,000.
- Only 43 percent of Black Americans own their own homes, compared with 72 percent of White families.
- White families are twice as likely as Black families to receive an inheritance, according to the Economic Policy Institute, and that inheritance is three times as much as that left to a Black family.
All these things and more throughout history have made accumulating generational wealth a challenge for many Black Americans. But financial planners can make a difference. And considering the small number of Black CFP® professionals, the burden cannot and should not rest solely on their shoulders.
So, let’s focus on seven things that all financial planners can do now to help Black families increase generational wealth and improve the outlook for their children and grandchildren.
1. Encourage Black clients to purchase more life insurance.
Nickolas Abrams, CFP®, president of AJW Financial Partners LLC in Baltimore, Maryland, says Black Americans are wasting a major tool for generational wealth by only buying enough life insurance to bury themselves. Those $5,000 life insurance policies must go, he says. They should be purchasing $100,000 and $200,000 in life insurance so they can pass wealth to their children and grandchildren.
Paying for burial expenses is the number one reason people of all colors buy insurance, according to various surveys. The number two reason, however, is to pass on generational wealth.
According to a Haven Life survey, Black Americans have an average of $50,000 in life insurance compared to $150,000 for White Americans.
As with other various financial institutions, there is plenty of history between Black Americans and insurance companies that may explain some of the trust issues. Life insurance companies for years charged higher premiums for Black Americans. After the Civil War, life insurance companies began charging higher rates or denying them coverage altogether, assuming they had higher mortality risks. These separate rate cards carried into the 1960s, when they were banned in some states.
2. Encourage Black clients to talk about money with their children.
With many Black families, it’s almost taboo to talk money with their children. Children grow up not understating how much things like rent and utilities cost, let alone how to save and invest.
A friend told me recently he had dinner with his girlfriend’s family. He is Black and his girlfriend is White. It was nothing like dinners at his house growing up, he said. The White family talked about a lot of things, including money and investing. That’s not to say every White family has discussions about finances, but it was a quite different experience for him.
An entrepreneur friend in New York told me her mother made her write out the checks to pay the household bills. She grew up knowing how much the rent was and all household costs. As a result, she says she never asked for anything because she knew there was no money left. She ultimately did the same with her daughter.
3. Reach out to Black millennials.
The financial numbers for Black millennials are disturbing. According to the Federal Reserve Bank of St. Louis, Black millennials are less wealthy than their baby boomer parents were at a comparable age and are well behind their White and Hispanic counterparts.
“Older Black millennials steadily fell further behind and had very low wealth levels, which left them more vulnerable to unpredictable economic setbacks,” the report said.
Black millennials earn just 60 percent of what their White counterparts earn. The median White millennial household earns $60,800 annually and has a net worth of $35,200, according to the St. Louis Fed data. The median Black millennial household only earns $37,300 annually, with a net worth of $17,000.
Black millennials have more student debt and have a harder time finding a job post-graduation. Once they enter the workforce, they are paid less than their White counterparts. Reach them with financial planners who are their own age—planners they are more likely to listen to and trust.
4. Reach out to urban high schools, Black churches, and HBCUs.
Today, there are 107 HBCUs serving more than 228,000 students across the U.S. They operate as both public and private colleges. While they have traditionally served Black students, nearly 25 percent of their students are other races. The majority of the HBCUs are in the South and Texas, but a few are in the Midwest, Mid-Atlantic, and California.
These students are going to graduate with considerably more student debt that their White counterparts and, thus, are more likely to default. An understanding of student loan debt and how planning can help through those first years of employment may resonate more with them.
High schools still lack basic finance and personal planning classes. But these students could be quick learners, and again, they can get into the habit of going to a financial planner early in their lives.
New England Patriots linebacker Brandon Copeland teaches financial literacy at his alma mater, the University of Pennsylvania. As part of his course, he brings in young Black high school students in Philadelphia to learn.
“I literally have videos on my phone of three African American kids from Philly, who had never heard about stocks before, passionately debating which stock was going to be better: Apple, Nike, or Uber,” Copeland told me in an interview. “Now they’re on the bus still having this conversation. Now they go home, and they’re still thinking about buying Nike stock, as opposed to buying Nike shoes. And so that is how we create a ripple effect.”
Mitchell Katz, a financial adviser and partner at Capital Associates in Bethesda, Maryland, has been teaching financial literacy in majority Black schools in Washington, D.C., for six or seven years.
“I do think I’m making a difference,” he said. “Even if you get through to one person, you’ve changed a life. In some of these places, life is bleak, and you know, some of the people have never even traveled out of those neighborhoods. So, being able to help them see the world through the lens of financial literacy definitely makes a difference. If you teach them and they bring it back to their parents, . . . they can bring it back to their community.”
5. A 401(k) or 403(b) can make a huge difference in their lives going forward.
Half of Black Americans have no retirement savings, compared to a third of White households. The median retirement savings for White households is nearly $80,000, compared with less than $30,000 for Black households.
I was a journalist for 40 years. For most of that time, I was a financial journalist. I made sure that Black journalists, young and old, signed up for and fully participated in their 401(k). One veteran journalist had a wife and two children and had never signed up for the 401(k), even though the newspaper had a 50 percent match on the first three percent you contributed. I literally walked him up to the payroll office to make sure he signed up.
I talked to a Black financial planner who had a client who was a professional earning six figures. Her company had a huge 401(k) match, something like 6 percent. Yet, she was only contributing 2 percent. He had to explain the concept of “free money” and how much she was losing by not maxing out her contribution. Luckily, she took his advice.
Don’t assume that people understand 401(k)s and IRAs. When you sit down with Black clients, make sure you talk to them not just about the money you invest, but also review their retirement accounts and life insurance policies to help them make better investment decisions. Remember, Black Americans are very conservative in their investments.
6. Help young Black adults pay down debt (or at least put them on the path).
On average, Black Americans carry more debt, and that’s one of the reasons Black Americans have lower credit scores. Lower credit scores lead to other things that contribute to the wealth gap, including higher interest rates on mortgages, car loans, and credit cards.
Black college graduates owe an average of $25,000 more in student loan debt than White graduates, or an average of $52,000 in student loan debt, according to Education Data Initiative. Upon graduation, they are more likely to struggle making the payments.
Nationally, more than 27 percent of Black households are late paying their debts, compared to 15 percent of White households, even though the median debt of Black households ($30,800) is less than half of White median debt ($73,800), according to Prosperity Now. The organization also found that just 40 percent of Black households reported having good or very good credit, compared to 65 percent of White households.
Make a debt pay-down a part of their financial plan. They can see the impact paying down debt will have on their futures.
Do not reject out of hand Black clients with high debt. Financial planners can work with a few families pro bono or at less than their normal fees. By changing the course of just one family, it could impact generations to come.
7. Make sure Black clients have a will and estate plan.
A will is the least expensive way to transfer intergenerational wealth. An estate plan can protect your wealth while you are alive and ensure that it is passed down to the next generation when you die.
Yet, more than 72 percent of Black families do not have a will, according to Caring.com’s “2021 Wills and Estate Planning Survey.” That compares with 67 percent of all Americans. The news has filled with Black entertainers and celebrities who should have known better but died without a will, including James Brown, Aretha Franklin, Prince, and Chadwick Boseman.
Nearly 45 percent of Black Americans own homes. Home ownership is just one way Black Americans can pass their wealth to the next generation. Yet, financial planners recall property disputes among siblings that went on for years and tore families apart because a parent died without a will or left a home to all the children without designating an executor.
“When we’ve achieved that pinnacle of the American dream, home ownership, there comes with it a need for legal protections if we want to be able to transmit that wealth to the next generation,” said Anne-Margaret Carrozza, a New York-based estate and eldercare attorney. “That involves protecting the asset from long-term care claims. We want to protect the next generation from having to go through probate, which can be a drain of 2 percent to 3 percent of the value of the total es