Despite evidence that younger investors are well-positioned to benefit from long-term retirement savings less than half (45%) plan to contribute to an Individual Retirement Account for the 2011 tax year, according to research.
A recent T. Rowe Price prospectus cites that more than half, 55%, say they do not plan to fund an IRA or are unsure whether they will by this tax filing season. Meanwhile 71% of these investors made an IRA contribution for the 2010 tax year.
According to the research about IRAs and the investing practices of investors from Generations X and Y (ages 35-50 and 21-34 for this study), the decline in commitment to IRAs is being driven by five factors:
- A belief that participation in a 401(k) plan is adequate for now (42%).
- A feeling that they can’t afford it (32%).
- Economic uncertainty (23%).
- Market volatility (14%).
- Uncertainty surrounding their job (12%).
If respondents had an extra $5,000, 56% of respondents say they would pay off existing debt or add to a “rainy day” fund while 16% say they would contribute to an IRA.
“Given their economic fears, it is understandable why many younger investors might be unable or unwilling to fund all of their tax-advantaged accounts and are focusing primarily on their 401(k) during this tax season,” says Stuart L. Ritter, senior financial planner for T. Rowe Price.
“However, younger investors must remember that their investments may need to cover 30 years or more of living in retirement,” Ritter adds. “They need to save consistently. There will always be some level of uncertainty and competing financial demands. The longer people wait, the more they will need to save later.”
Many younger investors have lost faith in stocks since they have experienced the subpar returns of equity markets over the past decade. Research finds that 22% of Gen X and Gen Y investors feel confident about the financial markets heading into 2012. Meanwhile 28% of investors who plan to fund an IRA this tax season will direct their contributions to more stable investments such as money market funds, the research shows, despite the historically low current yields and their lack of suitability as long-term retirement investments.
“Younger investors need to invest for growth,” Ritter says. “They shouldn’t focus on what the market did last year or what it might do this year. They are investing for decades and need to have an appropriate mix of stocks in their portfolios to have hope of achieving their long-term financial goals.”
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