Between sky-high inflation and stock market losses, it's not surprising that some people are a little leery of locking their money in a retirement account right now. After all, you usually can't access your retirement funds under 59 1/2 without a penalty, and there's no guarantee your investments won't take another dip.
But if you're still decades from retiring, the stock market's probably the best option for your retirement savings. Here's why.
It's all about the long term
It's disheartening to invest your hard-earned cash only to watch those investments lose money. A lot of people have been dealing with that 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 probably make your money back and then some. But it might take several years to do this. That's why you should usually only invest money you don't plan to spend for at least five to seven years. Without a pressing need, you can wait to withdraw the funds until you're ready.
Investing is pretty much the only way you can beat inflation and actually increase your purchasing power over the long term. While you can grow your money without risk of loss with a savings account or a certificate of deposit (CD), there's a strong possibility that the inflation rate rises faster, especially in years like this one. So while you're growing your wealth, your money won't go as far in the future because you'll have to spend more each year to afford the same standard of living.
With investing, there probably will be some years you'll lose money -- but over a few decades, there will be many more years you'll earn handsome returns. The S&P 500 index, for example, has a 10.7% compound average annual growth rate over the last 30 years. That means if you averaged out all the gains and losses in each year, you'd get a 10.7% gain each year. And that's despite losses as high as 37% in some years.
If you'd invested just $100 per month in a retirement account and it grew by 10.7% each year, you'd end up with over $238,000 after 30 years, despite only contributing $36,000 of your own money. There's no bank account that can give you that kind of return.
But older adults may want to be more conservative
Sticking with a stock-heavy portfolio, even through periods of market volatility, is wise if you're far from retirement, because you have plenty of time to bounce back from losses. But the same isn't true of those nearing retirement. They may want to take a more conservative approach.
As you age, you typically want to move your money out of riskier but potentially more rewarding stocks and into safer investments, like bonds. These may offer lower returns, but there's less risk of losing money on the verge 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 may also want to keep some of your savings in cash if you plan to spend it soon. In that case, think about opening a high-yield savings account. These offer higher annual percentage yields (APYs) than brick-and-mortar savings accounts, so your money grows a bit faster.
No one can predict the best time to invest or pull 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 performance get you down too much. Focus on your investments' long-term growth potential and resist the temptation to make any drastic changes to your portfolio.