Investing in your home vs. your retirement account: finding a balance between the two will make your golden years comfortable.

Are African Americans jeopardizing their chances to have a comfort able retirement in favor of the security of owning a home? The 2005 Ariel/Schwab Black Investor Survey found that African Americans place a substantially greater financial value on their homes when it comes to retirement planning, even though employer-sponsored retirement plans could potentially deliver a higher annual rate of return over the long term.

Such views could have a major effect on the ability of African Americans to save enough money for retirement. Twenty-four percent of African Americans felt that their home's value would be more important to them in retirement than a 401(k), IRA, or 403(b) account, as opposed to 14% of whites. While real estate values have enjoyed double-digit appreciation in many regions of the country in the last few years, the historical average annual rate of appreciation for real estate is 5% to 7%, The historical average rate of return on money invested in the stock market is about 8% to 10%.

Carla Foster, vice president at Charles Schwab & Co., says those who plan their retirement around the value of their homes are neglecting other opportunities to grow their portfolios, She notes. "A recent study by the National Association of Realtors showed that sate prices of homes nationwide jumped 28% between the end of 2002 and May 2005. For that same period of time. the S&P 500 Index went up 41%. So stocks are still doing better than real estate."

Unfortunately, cultural attitudes toward wealth contribute to the preference African Americans have for real estate over investing. "What this survey tells us is that we still believe that homeownership is the true way to wealth, says Percy E. Bolton, a certified financial planner with Percy E. Bolton Associates Inc. "I think a lot of it is based on our historical relationship with the banking, credit, and financial institutions in America. We have not been treated very well by them." The distrust African Americans have for the financial industry prevents them from hiring experts to assist in retirement planning, says Bolton. Consequently, their knowledge of and exposure to available retirement plan options, such as 401(k)s. 1RAs, or 403(b)s, is limited. According to the study, not only do African Americans contribute $65 per month less than whites to their retirement plans, they are also 72% more likely to withdraw money from those plans prematurely.

Mellody Hobson, president of Ariel Capital Management LL.C., says African Americans should value their homes but understand that they don't replace disciplined retirement investing. "You can't eat a house or take it to the grocery store," says Hobson. "At the end of the day, a conscious retirement savings plan is the only way to ultimately have financial security." While owning a home during retirement is clearly an advantage, saving and investing while you're still employed will allow you to maintain your pre-retirement standard of living for the 30 years or so you may have after you leave your job.

Bolton, Foster, and Hobson urge black investors, particularly African American baby boomers, to diversify their investment portfolios to include all asset classes--stocks, bonds, cash, and real estate. Remember, says Foster, "real estate, just like any other investment, has good years and bad years. It moves up and down with market cycles. So you want to make sure that your overall investment portfolio is balanced."

Bolton says financial literacy is the key to future generations of African Americans retiring comfortably without having to work longer. "We need to hire experts to help us build our wealth," he says. "We need to create a mastermind or network around us to advise us on the most appropriate actions to take."

Financial
importance
of home vs.
retirement plan

African American

Equally Important       29%
Home                    24%
Retirement plan         47%

White

Equally Important       18%
Home                    14%
Retirement plan         68%

Survey Base: Own home and have retirement plan

SOURCE: 2005 ARIEL/SCHWAB BLACK INVESTOR SURVEY

Note: Table made from pie chart.