Every HBCU Freshmen Should Have A Roth IRA

“There are more important things in life than a little money, and one of them is a lot of money.” – Anonymous

You are standing at graduation and thinking about the “real” world you are about to enter. Its an exhilarating feeling. The one thing that has not been on your mind at all the past 4 years. Retirement. Of course why should it be you are just starting your 20s. You have plenty of time to worry about stuff like that you think to yourself – and you would be wrong.

The basics first. What is a Roth IRA? In the simplest explanation it is a retirement and savings hybrid investment vehicle that allows an individual to invest after-tax income into investments and earn tax-free returns over the life of the account. Any contributions (principal) you deposit can be withdrawn in the case of an emergency without penalty. You can not withdraw the earnings on that money though without penalty. The income eligibility for it requires a single person to make less than $105,000 gross to participate and less than $167,000 for married couples. You can contribute currently no more than $5,000 annually to the account. My belief is the Roth IRA is a much more vital vehicle to African Americans than their 401(K) which I discussed in an article titled “STOP: African Americans Should Not Be Maxing Out Their 401(K)“.

The reality of the matter is we are in a bad news, bad news, and some good news situation. In an attempt to put lipstick on the pig I will start with some good news. The gap between the African America’s savings rate and European America’s savings rate as a percentage of median income is only 100 basis points (or 1%). But here comes some ice cold water, versus our Asian America counterparts the gap is 2300 basis points (or 23%).  African Americans currently save 7% of our median income versus 8% and 30% for European and Asian Americans respectively. Couple that with median incomes of $65,637; $55,530; and $34,218 for Asian, European, and African Americans respectively you can see just how dire the war of wealth and resources is for us. We are saving the least and making the least. The low income is a result of lack of business and enterprise ownership. The savings rate while close to our European American counterpart is kind of misleading. We are basically running at a pace slightly slower with someone who is already 50 yards out in front of us and then miffed at why we can not catch up. A higher savings rate would require a cultural shift in thought within our own institutions.  Unfortunately, even if we were saving 50% of our income we still would not be savings as much in real dollars as Asian Americans on an annual basis. Their higher incomes in large part are based on the concentration they have in engineering and medicine along with high reinvestment of their savings into assets that generate residual and investment income.

All is not lost though because one of the major ways to combat this reality is a policy called TIME. Earlier saving will allow compound interest to work in our favor as opposed to against us.  Let us assume you are standing at graduation with $5,000 in your Roth IRA invested and never add another penny for the next 40 years other than the returns it generates on its own. The stock market has historically delivered a 12% return on investment. Over a 40 year window that is still quite a reasonable expectation with the ebbs and flows of the market. Your Roth IRA at age 62 would be worth over $465,000. However, let us say you decide to wait a decade and get more “settled” to start. You are in your early 30s with $5,000 to start and never add another penny. That “lost” decade will see the value of your Roth IRA at 62 drop dramatically to a worth of approximately $150,000. Or you can even attempt to play catch up and add $1,000 each year going forward for the next 30 years. You would still come up short only reaching a worth of $420,000.  Can our community and your family afford to just leave $45,000 on the table? Imagine your own parents. Do you think they could use an extra $45,000 right now? Now, what makes you think you will not need it when you reach that age? Hoping you will not need it is a dangerous strategy.

HBCU financial aid departments could use some goodwill amongst HBCU students and should take up the mantle of this task. I have argued that HBCU freshmen should be on campus at least 2 weeks prior to the returning student body (my own preference would be a month) for an orientation of school history, class bonding, and at which time the financial aid departments would hold mandatory financial literacy and philanthropy classes for students sponsored by an African Diaspora owned financial institution. Upon the completion of this they would assist the students in opening a Roth IRA with an African Diaspora owned financial institution. It of course, preferably, would be with the HBCU Credit Union.

It is small steps like these that can strengthen the social and economic infrastructure fabric of African America. Take the rotten seed of miseducation rampant in our students about finances and our lack of circulation as a whole as a group and plant a new seed that will grow a tree that bears the fruits of wealth and shade of protection to our Diaspora.