Many seniors run into financial trouble when they enter retirement without much money in savings and realize their Social Security benefits won’t pay enough to cover their living costs in full. That’s why it’s so important to start building a retirement nest egg from a young age — ideally, as early as when you earn your first paycheck.
Now, there are different accounts you can use to save for retirement. If your employer offers a 401(k) plan, that could be a good bet — especially if you’re entitled to some sort of matching incentive that puts free money into your account. If you don’t have access to a 401(k), or if you don’t like your company’s plan, you can always open an IRA — either a traditional one for an immediate tax break on contributions or a Roth IRA for tax-free retirement withdrawals.
And of course you can also look at putting some of your retirement savings into a traditional brokerage account. Though you’ll give up the tax breaks that IRAs and 401(k)s offer, you’ll get more flexibility with your money.
But one account that isn’t right for retirement savings is a regular old savings account. And if you use one to build your nest egg, you might wind up sorely disappointed.
Your money needs to grow
The value of money tends to erode over time thanks to inflation. And so if you’re saving for a far-off milestone like retirement over a lengthy period of time, you need to generate a high enough return on your money to outpace inflation.
A savings account generally won’t make that possible. Even when savings accounts pay generously, you may not earn more than a 2% or 3% return on your money each year. But that’s not enough to outpace inflation and grow the nest egg you need. Rather, you should really be aiming for much higher returns on your money. And investing is the way to get there.
Whenever you invest money, you take on some risks, whereas if you keep your money in a savings account, your principal is protected (at least up to $250,000 per depositor in an FDIC-insured account). But in exchange for that risk, you get an opportunity to grow your money at a more rapid rate than what a savings account will allow for.
If you put money into an IRA or brokerage account and load up on stocks, you might lose money some years. But if you’re saving over a 40-year period, you’re likely to ultimately come out ahead financially. And you might generate two or three times the return you’d get by keeping your money in a regular savings account.
Make the right call
If you have money set aside for emergency expenses, then a savings account is absolutely the right home for that cash. But when it comes to retirement funds, a savings account isn’t a great place to keep your money. Doing so could mean missing out on larger returns — and winding up cash-strapped once your career comes to an end.
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