Why a savings account is the wrong choice for your retirement savings

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It just won’t give your money the growth you need.


Key points

  • Saving for retirement can help ensure you don’t run out of money later in life.
  • There are different accounts you use for your retirement nest egg, but a savings account shouldn’t be one of them.
  • IRAs and 401(k)s are better options for saving for retirement.

Many seniors experience financial hardship when they retire without much money in savings and realize that their Social Security benefits will not be enough to fully cover their living expenses. That’s why it’s so important to start building a retirement nest egg at an early age — ideally, as soon as you earn your first paycheck.

Now, there are different accounts you can use to save for your retirement. If your employer offers a 401(k) plan, it could be a good bet, especially if you qualify for some sort of matching incentive that puts free money in your account. If you don’t have access to a 401(k), or don’t like your company’s plan, you can always open an IRA – either a traditional one for immediate tax relief on contributions, or a Roth IRA. for tax-free pension withdrawals.

And of course, you can also consider putting some of your retirement savings in a traditional brokerage account. Although you forgo the tax breaks offered by IRAs and 401(k)s, you will get more flexibility with your money.

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But an account that is not right to retirement savings is a regular old savings account. And if you use one to build your nest egg, you might be very disappointed.

Your money must grow

The value of money tends to erode over time through inflation. And so if you’re saving for a distant milestone like retirement over a long period of time, you need to generate a high enough return on your money to outpace inflation.

A savings account will usually not make this possible. Even when savings accounts pay generously, you can’t earn more than 2% or 3% back on your money each year. But that’s not enough to beat inflation and grow the nest egg you need. On the contrary, you really should be aiming for much higher returns on your money. And investing is the way to get there.

Every time you invest money, you take risks, whereas if you keep your money in a savings account, your principal is protected (at least up to $250,000 per depositor in a FDIC). But in exchange for this risk, you have the opportunity to grow your money at a faster rate than a savings account allows.

If you put money in an IRA or brokerage account and load stocks, you may lose money in some years. But if you save over a 40-year period, you’ll probably end up financially out of it. And you could generate two or three times the return you would get by keeping your money in a regular savings account.

Make the right call

If you have money set aside for emergency expenses, a savings account is just the right home for that money. But when it comes to retirement funds, a savings account is not a great place to keep your money. It could mean missing out on bigger returns – and running out of money once your career is over.

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