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20% of Workers Risk Falling Dangerously Short on Retirement Income for This Reason

By Maurie Backman – Jun 24, 2020 at 6:18AM

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Hint: It has to do with the way they're investing their savings.

The money you get from Social Security won't be enough to cover your retirement expenses entirely. Those benefits will only replace about 40% of your pre-retirement income if you earn an average wage, and most seniors need about twice that amount to cover their expenses without feeling squeezed financially.

That's why saving for your senior years is imperative, but that's only part of the picture. It's equally important that you invest your savings in a manner that's apt to generate decent growth. Otherwise, you may find that your nest egg does a poor job of helping you pay for retirement when you factor in the effects of inflation.

Middle-aged man with serious expression sitting at a computer and looking at documents.

Image source: Getty Images.

Unfortunately, an estimated 20% of workers are investing too conservatively for retirement, according to a recent Transamerica survey. Specifically, that percentage of millennials, Gen Xers, and baby boomers combined is focusing on bonds, money market funds, and cash in their retirement accounts, rather than putting a large chunk of their savings into stocks, which have historically delivered much stronger returns.

If your goal is to retire with enough money to pay the bills and enjoy life, then you'll need to invest a substantial chunk of your retirement savings in stocks. Otherwise, you may wind up sorely disappointed.

The danger of avoiding stocks in your retirement plan

The reason many people stay away from stock investments is clear: There's more risk involved. Bond prices, by contrast, don't tend to fluctuate as rapidly as stock prices, so they're a more stable bet as far as investments go. But what you'll gain in stability, you'll lose in growth. And missing out on that growth could put you in a position where you struggle to pay the bills as a senior.

Imagine you're able to set aside $300 a month in your IRA or 401(k) throughout your career. The following table shows what your ending balance will look like if you load up on stocks and your investments generate an average annual 7% return (which is actually a few percentage points below the stock market's long-term average):

Start Saving $300 a Month at Age:

Here's What You'll Have by Age 67 With a 7% Average Annual Return:


$1.028 million











Table and calculations by author.

As you can see, you're looking at some pretty substantial investment gains in your retirement account, especially if you start out really young. On the other hand, if you focus mostly on bonds and safer investments in your IRA or 401(k), you may only see an average yearly 4% return in that account. And here's what your ending balance might look like in that case:

Start Saving $300 a Month at Age:

Here's What You'll Have by Age 67 With a 4% Average Annual Return:













Table and calculations by author.

It's impossible to ignore the difference between a retirement account balance of over $1 million versus a balance of just $436,000, which is the discrepancy you might have on your hands in the course of a 45-year investment window when you choose stocks versus bonds. Or to put it another way, for the same dollar amount in out-of-pocket contributions, would you rather wind up with $1.028 million or less than half that amount?

Though investing in stocks can be a scary prospect, the good thing about doing it in a retirement plan is that you're dealing with a lengthy savings window, which means that if the stock market tanks, you'll have plenty of time to recover. Of course, as retirement nears, you'll want to shift toward safer investments to minimize your risk, but if you're seven years or more away from that milestone, then stocks continue to make sense -- even if loading up on them means pushing yourself outside your comfort zone.

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