Five Secrets About LGBT 401(k) Plans
How LGBT people can manage and invest their 401(k) plans
|Written by Tom Yeung, CFA | CDFA|
Investment Advisor & Fund Manager, Jurnex Financial Advisors
LGBT 401(k) plans deserve special attention. Because let’s face it. We’re not known as big savers. A study by Experian, a credit ratings agency, found that 44% of LGBT people said they struggle to maintain savings, compared to 38% of the general population.
That’s because good investment advice is hard to come by, especially as an LGBT individual. Most investment advice gets written with the most significant US target in mind: straight white men. There’s nothing wrong with writing investment advice for the masses, but trying to use general information as an LGBT individual doesn’t work.
That’s because the complexity of LGBT finance gets compounded by discrimination, lower pay, adoption considerations, and asset titling for unmarried couples. Fortunately, there is a secret weapon at your disposal: the 401(k). Also known as a 403(b) plan for public-sector workers. And because the 401(k) plan is so essential to retirement savings, I’d like to tell you my five secrets about LGBT 401(k) plans.
What makes LGBT 401(k) plans different?
Saving for retirement isn’t sexual-orientation specific. But LGBT people face issues that straight people don’t.
Wage discrimination. LGBT people face wage discrimination at work. According to the Williams Institute, gay men earn around 15-25% less than straight men for the same job. Lesbians face gender discrimination, making just 75 cents to the dollar that straight men do. And the transgender pay gap is perhaps by far the largest of any minority group. They face a poverty rate more than four times that of the general population.
However, there’s some good news. Investing in your 401(k) plan can help equalize pay gaps. That’s because 401(k) plans are an excellent way to automatically enroll yourself in one of the most tax-advantaged savings plans available in the US. Unlike other savings plans, 401(k)s directly deducts from your earnings, making it far easier to save for retirement.
LGBT 401(k) investing won’t change the discrimination. But it can certainly give you a head start on having a better retirement. And that’s a pretty good start.
What is a 401(k) plan
In short, a 401(k) is a type of savings plan that’s sponsored by your employer. The public employee version is known as a 403(b). With a 401(k) plan, your wages are automatically deposited into your 401(k) account, decreasing your taxable income. Not only will your current taxes be lower, but your retirement savings will also grow tax-free.
Tax savings. If you make $100,000 and pay 30% taxes, you will pay $100,000 * 30% = $30,000 in taxes per year. By saving $10,000 in your 401(k) plan, your taxable income decreases to $90,000, meaning you’re only paying $90,000 * 30% = $27,000 in taxes. That’s $3,000 in tax savings today.
Tax-free growth. Also, that $10,000 can now grow tax-free until you withdraw it penalty-free whenever you reach age 55. And once you DO take the cash, you’ll have to pay income taxes, but probably at a much lower rate because you’ll be retired.
Employer matching. As a bonus, around half of 401(k) plans also offer employer matching. That means for every dollar you put into your 401(k), your employer will add another dollar to the account, allowing your savings grow even faster.
You can read more about 401(k) plans in my ultimate guide to 401(k) plans here.
Why save more for retirement?
Savings isn’t just an LGBT problem. In the 1960s through the 70s, savings rates averaged around 12.5%. Today, that number is closer to 8%.
That’s a problem because today’s pension plans are becoming less generous. Numerous failures of company pension plans mean that today, only 13% of people have access to defined benefit plans. Meanwhile, 53% of people have access to defined contribution plans (which require saving), and the remaining 35% have zero access to employer plans whatsoever.
And even those on employer-sponsored plans, 17% have taken out loans against them. By taking loans, workers forgo return on borrowed money.
There’s no short-cut to investing.
Let me be clear. There is no shortcut to sound long-term investing. You might get lucky and hit on the next Bitcoin, but trying to win the lottery isn’t a great retirement plan.
In the LGBT community, there’s also a “forever young” mentality that causes people to spend more and save less. But that’s not the right way of looking at things. We all get old one day, and we should prepare financially for our golden years.
Saving more can help you become financially independent.
“Savings” shouldn’t be a dirty word. That’s because all the money you save for retirement is still your money. It doesn’t vanish into thin air!
Eventually, your savings will be substantial enough that you can live off them alone. That’s called retirement. And it doesn’t have to be at age 65. It’s whenever you decide you can afford to never work for money again.
But to get there, your 401(k) plan is one of the most powerful tools you have in your arsenal. That’s because deductions are automatic, and so investing becomes effortless. 401(k) plans also tend to run well on autopilot, allowing your investments to grow without triggering any trading fees.
How much should you save?
I recommend most clients save at least 15% of their income for retirement. This number can vary depending on your current savings, life situation, and retirement goals. So as always, I recommend people reach out to an investment pro before making a final decision. It’s far easier to change course today than down the road. But as a general guideline, Saving 15% of your income is a pretty good start.
Also, you want to make sure you’ve covered two things before starting to accumulate your 401(k)
- High-interest debt. You should pay down any debt with >8% interest rate before investing in your 401(k). That’s because high-interest debts can accumulate interest quickly. Low-interest mortgages and federal student debts can be paid back much more slowly.
- 3-6 months of emergency cash. You should have cash on hand in case of medical or other emergencies. You can always borrow from your 401(k), but because markets can also go down, you’re not guaranteed to have money when you need it most.
LGBT Discrimination Is Still WRONG
Let me be clear. Just because I’m suggesting you invest more in your 401(k) plan doesn’t mean I condone the LGBT wage gap. On the contrary, I’m a financial advisor who specializes in LGBT issues because I CARE.
The world won’t change overnight. The LGBT wage gap is persistent, pernicious, and hard to fight. And so even though I highly recommend you try changing the world we live in for the better, you should still prepare for your retirement today. And that means using every tax-advantaged tool at your disposal.
The Five Secrets About LGBT 401(k) Plans
When it comes to 401(k) investing, there are certain secrets that LGBT people must know.
1. 401k plans can help LGBT people catch up on savings
Even today, gay men and women still face significant wage discrimination. But thanks to the power of compound interest, you can level the playing field by saving more of your dollars. It might mean spending less than your counterparts today, but you’ll have a far more comfortable retirement.
That’s because every dollar saved in your 20s turns into seven dollars in retirement. And that in today’s dollars. Once you add employer contributions, that $1 turns into $14 at retirement. And even if you aren’t that young, one dollar saved in your 50s still becomes to four dollars by the time you retire if you include employer matching.
2. Domestic partnership benefits often don’t include 401(k) benefits.
Many people are surprised at the limitations of domestic partnership benefits.
The good news. According to the Human Rights Campaign Foundation, the number of companies offering domestic partner benefits has risen steadily, from around 100 in the 1980s to more than 2,500 in 2000. These days, about 80% of all companies offer domestic partnership benefits.
The bad news. However, just because you have a domestic partner doesn’t being your 401(k) will automatically get transferred to them if something were to happen to you.
That’s because, under Federal law, your 401(k) will automatically transfer to your next-of-kin unless you request otherwise. So if you and your partner are unmarried, you MUST list your partner as the beneficiary for them to receive your 401(k).
What to do. Most employers will ask you to complete a beneficiary designation form when you first sign up for the plan. But with some programs, you might have to request a written form from the plan administrator.
3. LGBT 401(k) plans are essential for retirement spending
According to the Social Security Administration, the average Social Security benefit was just $1,461 per month in 2019 or $17,532 per year. While that might cover the essential expenses, retiring on less than $20,000 per year isn’t much fun.
Access to Low-Cost Living. Straight people have the benefit of being able to retire to lower-cost regions. That might also include living abroad in retirement. For LGBT people, the options can be more limiting because of persistent discrimination in rural areas and foreign countries.
Long-Term Care. Even with long-term care facilities, LGBT people can still face discrimination. As of 2019, 26% of Americans still disapprove of gay marriage, according to Gallup.
That’s why you must contribute to your 401(k) plan (or an IRA if your workplace doesn’t offer one). While you can still lower your expenses in retirement, it’s not as easy to find LGBT-friendly communities in the lowest cost-of-living areas.
4. 401(k)s help LGBT people become more financially independent
“Having the fundamental right to marry has begun to simplify financial lives within the LGBT community,” said Kent Sluyter, CEO of Individual Life Insurance and Prudential Advisors. “Unfortunately, wage inequality, workplace insecurity, and pension survivor benefits issues still cast a shadow on the ability to attain true financial security.” Source
Here’s where a 401(k) plan can help LGBT people get ahead.
The great thing about a 401(k) plan is that the plan sponsors will create the account in your name alone. Though Federal law automatically designates your spouse as the secondary beneficiary, your 401(k) will stay in your name alone while you’re alive. That’s important because it can help serve as a measure of your contribution to any equitable distribution state.
5. LGBT 401(k) investors need to stay active investors
Did you know your investment dollars might be funding anti-LGBT causes? That’s because your investments might include ETFs.
The good. On the positive side, ETFs allow investors to buy hundreds of companies for close to zero commissions and fees. Low-cost ETFs have saved investors hundreds of thousands of dollars.
The bad. ETFs buy vast amounts of shares in EVERY company in its underlying index, whether you agree with their policies or not. An investment in an S&P500 ETF, for instance, will result in owning shares of Home Depot and Costco. In the case of Home Depot, the company contributed $1,825,500 to anti-gay politicians from 2017-2018. These donations included a $20,000 gift to Doug Collins (R-GA), a congressman who opposed The Equality Act. The Equality Act would have expanded the 1964 Civil Rights Act to ban discrimination based on sexual orientation or gender identity.
In the case of Costco, the company has refused to offer equivalency in the same and different-sex spousal benefits.
What can you do as an investor?
Simple. Rather than buy index funds, you can become an active investor and pick 8-12 great companies to buy. In my article on diversification, I discuss how buying 12 companies already eliminates 90% of the risk that buying 100 companies does, thanks to the correlation between stocks in the marketplace.
Buying great companies doesn’t have to be complex either. In my article on LGBT investing 101, I cover the key points on how to spot great LGBT-friendly investments. Fortunately for the LGBT community, some of the most forward-thinking companies on LGBT rights are also the best-performing investments as well.
If this seems like a lot of information, don’t worry. The great news is that help is available. Consider talking to an LGBT investment advisor about your 401(k) today. These are advisors who have experience in helping LGBT individuals and families navigate finances.
Where to find more resources
If you’re looking for even more investment tips, you’ve come to the right place.
That’s because I’ve helped invest client money for over a decade in the same old-fashioned way. And that’s to seek out great companies in great industries that can you can buy at a discount to their fair value. Sounds too simple to be true? Give me a call today, and I’ll show you that it’s still possible after all these years.
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