Financial Planning, Retirement

Pre-Retirees Must Focus On The Long-Term

7/11/17 8:00 AM

iStock-622064048.jpgEnsuring a financially secure retirement typically requires a long-term focus but unfortunately this is something that many Americans appear to lack. For example, more than a third (36 percent) of respondents in a TIAA-CREF survey said that they believe the 1-year performance of an asset is the most important investment indicator that they can consider. Sixteen percent of surveyed market participants said that they view quarterly returns as the most important investment indicator, and nearly half (47 percent) reported that they regularly make trading decisions based only on an asset’s performance during the previous twelve months rather than over a longer time horizon. With roughly seven in ten respondents also saying that they believe a diversified portfolio will eliminate all investment risk, it seems that a general lack of expertise may be partially to blame for this myopic behavior, and therefore provide another reason for investors to consult with a professional financial advisor.

Other evidence of Americans’ short-sightedness can be found in a recent report from the Investment Company Institute (ICI), which showed that 17.0 percent of participants in 401(k)s and other defined contribution plans had related outstanding loans at the end of the fourth quarter of 2016. That is toward the high-end of the historical range and even above the 15.3 percent reading that occurred in 2008 during the heart of the “Great Recession.” While having the ability to borrow from your 401(k) plan can definitely be useful in the event of an emergency, e.g. an unexpected and significant medical expense, it is generally a good idea to never touch your long-term savings until you are actually ready to retire. Moreover, 401(k) plans are intended to help participants amass a significant retirement nest egg through routine, tax-advantaged contributions and the return generated from properly investing those savings. Abusing the borrowing privilege hinders the effectiveness of this retirement tool, which is a waste considering just how powerful consistent 401(k) participation can be.

Indeed, the S&P 500 rose 0.5 percent last month but participants in tax-advantaged 401(k) plans fared even better in June, according to new data from the Employee Benefit Research Institute (EBRI). Specifically, the average 401(k) account balance for younger (25-34), less tenured (1-4 years) workers rose by 2.0 percent last month, while older workers (55-64) with more than 20 years of tenure saw their 401(k) balances rise by an average of 0.6 percent. Even more impressive is that since the start of 2015, the average 401(k) account balance for younger, less-tenured workers has surged by 126.0 percent, while the S&P 500 has gained just 17.70 percent (through the end of June 2017). Older, more-tenured workers saw their 401(k) balances rise by an average of “only” 24.4 percent during this same period, not surprising since these individuals tend to have much larger accounts that are less sensitive to both contribution size and market fluctuations. Altogether, the substantial gains should further highlight the importance of persistent participation in these tax-advantaged savings vehicles.



Sources: TIAA-CREF, NAPA, Benefits Pro, ICI, EBRI

Post author: Charles Couch