Retirees urge young investors to contribute to a 401(k) retirement savings plan before addressing other financial goals. Why?
With the 20-20 vision that comes with hindsight, retirees are urging beginning investors to contribute to a 401(k) or other employer-sponsored retirement plan before they tackle other financial goals.
The overwhelming majority of retirees surveyed by Millionaire Corner in March say the primary focus of beginning investors should be to build up their 401(k) retirement assets. This is the primary piece of financial advice that nearly 80 percent of retirees say they would give to a young investor.
About 12 percent of retirees say it’s most important for a beginning investor to buy a home while prices are low, and about 8 percent say investing in the stock market should be a beginning investor’s top priority. Roughly 2 percent say saving money in a CD or other bank account should be a beginning investor’s primary goal.
The strong emphasis on retirement savings reflects the precarious financial position of many of the nation’s senior citizens. More than one-fourth or retirees surveyed in March say they are “worse off” now than they were four years ago, while less than one-third describe themselves as “better off.” This contrasts with the relative optimism of non-retired Americans. Nearly one-half of those still working says they are better off now than during the financial crisis, while 23 percent say they are worse off.
Retirees also report the most substantial losses in their home values over the past five years. More than 40 percent say the value of their home is “substantially lower,” while more than 37 percent say it is “lower” than it was in 2007, according to our March survey. In contrast, 28 percent of non-retired Americans report a substantial five-year drop in home values, and 35 percent say their home value is “lower.”
Inflation, health care costs and having adequate retirement savings are the most significant financial concerns facing today’s retirees, according to our February survey. In an economic climate of elevated retirement concerns, the 401(k) plan is emerging as the primary retirement-savings vehicle available to U.S. workers, according to Millionaire Corner’s 2012 Retirement Market Insights report. Total assets held in employer-sponsored retirement plans were $10.4 trillion at the end of 2011, an increase of 1.9 percent from $10.2 trillion in 2010, according to our report.
A 401(k) is an employer-sponsored retirement plan funded by contributions from employee’s paychecks. These contributions may be augmented by an optional contribution from employers, who typically match a share of the employee’s contribution.
“A 401(k) or similar employer-sponsored retirement plan can be a powerful resource for building a secure retirement—and an employer match can add a substantial amount to an employee's nest egg,” according to an Investor Alert from the Financial Industry Regulatory Authority, which also notes that a401(k) retirement plan offers significant tax advantages. Contributions can be made with pre-tax dollars, and any earnings – including interest, dividends and capital gains - are all tax-deferred. According to FINRA, “That means you don't owe any income tax until you withdraw from your account, typically after you retire.”