When it comes to retirement, saving money is generally not
enough; you will likely need to invest it to ensure you have enough to live
comfortably in your later years. With banks offering historically low rates,
here is your biggest enemy when it comes to saving for retirement.
The interest rates are not ideal
While a savings account serves a valuable purpose in your
financial planning -- mainly as a place for your emergency savings (three to
six months' worth of expenses) -- it shouldn't be the primary place to put your
retirement savings. If you're wondering why, look no further than the interest
rates offered on savings accounts.
As of December 2021, the average interest rate on U.S.
savings accounts was 0.06%. That means if you held $10,000 in the account for a
full year, you'd only have $10,006 at the end. While any gains are better than
none, making $6 a year on $10,000 is far from ideal.
You need to keep up with inflation
2021 was one of the worst years for inflation that we've
seen recently, with a 7% increase, the highest since 1982. For consumers, this
means $1 at the beginning of the year was roughly worth only $0.93 at the end.
Although a 7% annual inflation rate is far from normal, you
can expect inflation to rise between 1% to 3% a year, generally speaking. That
means if your retirement savings are not at least earning that much annually,
they're losing their purchasing power. And that will make it harder for you to
retire as comfortably as you'd like, especially with the low rates on
traditional savings accounts.
You may be tempted to dip into your retirement savings
Unfortunately for most people, it's way too easy to access
the funds they have in their savings account, especially if their checking
account is with the same bank. With most banks having a mobile app, it can be
tempting to simply move money from your savings to your checking account
whenever you want to make a purchase you couldn't otherwise afford.
Retirement accounts, such as a 401(k) or IRA, have
limitations and penalties in place to deter you from withdrawing from your
account before retirement. For example, an early withdrawal from a 401(k) will
result in income taxes being owed, as well as a 10% early withdrawal fee.
Depending on your tax bracket, that could result in receiving only around half
of the intended amount.
Investing for retirement doesn't have to be complicated
You don't have to be a professional investor or money
manager to efficiently invest your money for retirement. For most investors,
investing in an index fund like the S&P 500, which has historically
returned 10% annually, should suffice and make saving for retirement much more
lucrative.
If you save $500 monthly for retirement for 30 years, the
difference between a savings account with 0.06% interest versus an index fund
that returns 10% is over $800,000.
While any amount of saving for retirement is a good thing,
there are ways to go about it that ensure you maximize your savings and put
yourself into a position to accomplish your financial goals and thrive in
retirement.
Click here for the
original article.