Between skyrocketing inflation and stock market losses, it’s not surprising that some people are a little wary of putting their money in a retirement account right now. After all, you usually can’t access your pension funds below 59 1/2 without penalty, and there’s no guarantee that your investments won’t take another dip.
But if you have decades of retirement, the stock market is probably the best option for your retirement savings. This is why.
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It’s all about the long term
It’s disheartening to invest your hard-earned money just to watch those investments lose money. A lot of people have been dealing with this lately. But experienced investors understand that these short-term dips are often just that: short-term.
If you’ve invested in strong, stable companies, you’ll likely earn your money back and then some. But it may take several years to do this. Therefore, you should usually only invest money that you do not intend to spend for at least five to seven years. Without an urgent need, you can wait to withdraw the funds until you are ready.
Investing is pretty much the only way to beat inflation and actually increase your purchasing power in the long run. While you can grow your money without risk of loss with a savings account or a certificate of deposit (CD), there’s a good chance that inflation will rise faster, especially in years like this. So as you grow your wealth, your money will not go that far in the future as you will have to spend more each year to afford the same standard of living.
With investing, there will probably be some years where you will lose money – but in a few decades there will be many more years where you will make nice returns. For example, the S&P 500 index has a compound average annual growth rate of 10.7% over the past 30 years. That means if you averaged all the gains and losses in each year, you would get a profit of 10.7% each year. And that despite losses of up to 37% in some years.
If you invested just $100 a month in a retirement account and it grew 10.7% each year, after 30 years you would have over $238,000 despite contributing only $36,000 of your own money. There is no bank account that can give you that kind of return.
But older adults may want to be more conservative
It is wise to hold onto a sizeable portfolio, even during periods of market volatility, if you are a long way from retirement, as you will have plenty of time to recover from losses. But the same is not true for those nearing retirement. They may want to take a more conservative approach.
As you get older, you typically want to move your money out of riskier but potentially more rewarding stocks into safer investments, such as bonds. These may offer lower returns, but there is less risk of losing money at the point of retirement. A good rule of thumb is to keep 110 minus your age in stocks. So if you’re 60, that would be 50%, and if you’re 70, it would be 40%.
You can also keep some of your savings in cash if you plan to spend it soon. Consider opening a high-yield savings account. These offer higher annual yield percentages (APYs) than physical savings accounts, so your money will grow a little faster.
No one can predict the best time to invest or take your money out of the stock market, so we just have to make our best guess based on our goals and when we plan to use the money. If time is on your side, don’t let recent achievements drag you down too much. Focus on the long-term growth potential of your investments and resist the temptation to make drastic changes to your portfolio.