They’re gonna regret it…
Early withdrawals from 401ks and other retirement accounts are on the rise among younger Americans, many of whom seem to have a skewed perception of what it takes to retire successfully.
The latest Streetwise study from E*TRADE discovered that nearly 60 percent of participants between the ages of 18 and 34 have made an early withdrawal from their retirement account. Just three years ago, only a third of young investors admitted to doing so.
Despite depleting their funds, almost all retirement savers in this age group (89 percent) said they are somewhat to very confident that they will save enough to experience an enjoyable retirement.
“Ignorance is bliss” couldn’t apply more, especially when considering most of them are under the impression they’ll only need to save between $250,000 to $999,999 to achieve retirement security.
Boomer investors, on the other hand, would recommend saving $1 million to $2 million.
In terms of deferral rates, younger participants’ beliefs aren’t as far removed from reality. Almost half (44 percent) would tell a friend or family member to save between 6 and 10 percent. Their actions, however, leave room for improvement.
Although financial professionals would advise saving 15 percent, a rate of 10 wouldn’t be terrible—if young investors were actually deferring that amount. However, only 38 percent of 18- to 34-year-old participants are actually putting aside 6 to 10 percent of their income.
“Saving for retirement continues to be a key challenge and a core area of focus for investors,” Mike Loewengart, VP of Investment Strategy at E*TRADE Financial, said in a statement. “While some younger investors have started on a solid savings path, many are exhibiting behavior that runs counter to their goals. There’s a need to bridge the gap between education and action, and the good news is, it’s never too late.”
In light of the research findings, Loewengart recommends that young 401k participants:
- Start saving. The earlier, the better. Don’t wait to start contributing to an employer’s retirement plan. Saving steadily over a period of time helps a nest egg grow through the power of compounding interest.
- Look, but don’t touch. First, consider setting up automatic contributions, which removes the guesswork from deciding how much to invest each period. Also, keep an eye on investment portfolios and be strategic about asset allocations. Resist the attempt to time the market—it’s a futile exercise. Be aware that withdrawing from a retirement portfolio early can come with serious penalties.
- Don’t leave money on the table. An employer match to 401k contributions is as close to free money as one will ever come by in the investing world, and probably the easiest way to seriously kick-start long-term investing. Those with IRAs should consider contributing the annual maximum ($5,500 for those under age 50 and $6,500 for those 50 or over) to make the most of these tax-advantaged accounts.
Jessa Claeys is a writer, editor and graphic designer.
