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401k Withdrawals More Common Among Minorities During Economic Downturn

The Huffington Post  |  By Posted: 04/ 4/2012 8:21 am Updated: 04/ 4/2012 4:54 pm

401k Withdrawal
People meet potential employers at a job fair held at the Jewish Community Center (JCC), on March 21, 2012 in New York City. More than 600 people registered to attend the job fair and meet potential employers.

Here's more evidence of just how hard the recession was on minorities.

African-Americans and Hispanic-Americans were more likely to tap their retirement accounts to get out of financial distress during the economic downturn, according to a new report from Ariel Investments and Aon Hewitt.

Of those with company retirement accounts that lost their jobs in 2010, 63 percent of African Americans and 57 percent of Hispanics completely cashed out their retirement savings, according to the study. About one-third of white and Asian-American savers that lost their jobs did the same.

Cashing out on or taking a hardship withdrawal from a retirement fund is a very costly move that cuts into current savings in addition to wiping out future returns. The government charges a 10 percent penalty for hardship withdrawals or cashing out, in addition to charging income tax on this cash.

Retirement accounts are effective largely because of their ability to grow quickly if they stay intact. Because of the compounding effect of interest rates, a retirement account with a 12 percent contribution rate ends up being three times as large as a retirement account with a 3 percent contribution rate after 35 years, according to the report.

The percentage of African-American savers taking hardship withdrawals from their company retirement accounts rose 40 percent between 2007 and 2010 to 8.8 percent of all African-Americans with company retirement accounts. Moreover, the percentage of Hispanics taking hardship withdrawals spiked 60 percent to 3.2 percent, while the percentage of white and Asian-American savers taking hardship withdrawals stayed below 2 percent.

One alternative to cashing out or withdrawing from a 401(k) is to take out a loan from a company retirement account and repay it through higher salary deductions. But these loans are risky. Though they have competitive interest rates, if you lose or switch your job while you have a loan outstanding, you have 60 to 90 days to pay it back in full, or else it becomes a withdrawal subject to penalties.

Half of all African-American savers and 40 percent of Hispanic savers have outstanding loans from their company retirement accounts, as compared to about a quarter of white savers. The percentage of African-American savers with outstanding loans from their retirement accounts spiked 25 percent between 2007 and 2010, and 38 percent among Hispanic savers.

The decision to withdraw from your retirement savings could force you to retire later than planned or threaten your financial well-being during retirement. About 51 percent of Americans are in danger of not being able to maintain their living standards in retirement, according to the Center for Retirement Research at Boston College.

The recession has hit minorities much harder than whites, and minorities were in a weak position to begin with. In 2009, African-Americans had just 5 percent the net worth of whites, and Hispanics had 5.6 percent the net worth of whites, according to the Pew Research Center. Blacks and Hispanics have lost more than half of their net worth since the housing bubble in 2005, in contrast to whites who lost 16 percent of their net worth, according to Pew.

African-Americans also are much more likely to be jobless. 14.1 percent of African-American workers were unemployed in February: nearly double 7.9 percent of white workers in the same time period, according to the Labor Department.

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