Please ensure Javascript is enabled for purposes of website accessibility

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

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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:

22

$1.028 million

27

$719,000

32

$498,000

37

$340,000

42

$228,000

47

$148,000

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:

22

$436,000

27

$342,000

32

$265,000

37

$202,000

42

$150,000

47

$107,000

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.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.