Without independent savings, you risk struggling to pay the bills during retirement.
That’s why it’s vitally important to contribute to your nest egg throughout your career. But where you choose to house your savings could dictate how much growth you witness. In that regard, millions of Americans are making an enormous mistake. (The Motley Fool)
An estimated 46% of U.S. workers use a regular savings account to sock away funds for retirement, according to GOBankingRates. Meanwhile, 30% are saving for their golden years in a 401(k), while 14% are putting their money into an IRA.
The problem with housing that money in a savings account, though, boils down to the fact that you can’t invest it. As such, you’re limited to whatever interest rate that account is paying, which is apt to be far below what you’d get with a diversified investment portfolio, which 401(k)s and IRAs allow for. And that could be disastrous for your retirement.
One benefit of keeping money in a savings account is that your principal is protected from losses, up to $250,000 per depositor. When you invest money in an IRA or 401(k), you do run the risk of taking losses when the market declines or downright tanks, as it tends to do from time to time. But if you keep your money invested for a lengthy period of time, you’re far more likely than not to come out ahead, especially if you do a good job of diversifying. And if you limit yourself to a savings account, your nest egg won’t grow in a manner that allows you to keep up with inflation.
Imagine you’re able to set aside $300 a month for retirement. The following table highlights the difference between housing that cash in a savings account versus an IRA or 401(k).
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