Why I'd Never Put My Retirement Money in My Savings Account

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  • You need to make informed choices about where to invest for retirement.
  • Your retirement money should not be in a savings account for two key reasons.
  • Putting your retirement money into savings would mean missing out on tax breaks and earning returns that are lower than the amount you need.

You should be setting aside money for retirement right now. You can't live on Social Security alone since it only replaces 40% of pre-retirement income. That's likely not enough, so you need a nest egg you can rely on to provide the rest of the money you'll need to support yourself.

Because I want to make sure I have a secure future as a retiree, I've been steadily investing for retirement. But not a penny of this money has gone into a savings account, and not a dollar of it will go into savings for the foreseeable future. Here's why that's the case.

Savings accounts won't provide the necessary ROI

The biggest reason why none of my retirement money is going into savings is because I know I can't earn the return on my investment (ROI) that I need by putting money in savings. Typically, high-yield savings accounts pay around 2.00% or less (although there have been some better rate offers recently during this time of high inflation). That's not a very good return for long-term investing.

See, savings accounts aren't designed to provide really generous returns since there's no risk of losing money and there's an inverse relationship between risk and reward. The higher the risk, usually, the greater the potential reward if it pans out. And I want to earn a reasonable return -- while taking on reasonable risk -- to make hitting my retirement savings targets more feasible.

Let's say I wanted to amass $1 million for retirement over 30 years and I planned to keep my retirement money in a savings account that provided an average 2.00% annual return on investment. To hit my target goal, I would need to put aside $2,054.16 every month for 30 years. But if I invested my money instead and earned a 10% average annual rate of return, I would only need to invest $506.60 per month.

I don't want to make my life a lot harder or reduce the chances of ending up with the needed funds, so I wouldn't even consider limiting my returns by investing my retirement funds in a savings account.

Savings accounts don't come with the same valuable tax breaks retirement accounts offer

Another big reason why I won't put my retirement money into a savings account is because I want tax breaks for my retirement investments.

Tax deductions are available when you invest in a 401(k) plan through your employer and when you invest in an IRA opened at brokerage firms. In general, you don't get to deduct money you contribute to a high-yield savings account in the year you make the contribution as you would with a tax-advantaged retirement plan.

Being able to claim a tax deduction for retirement investing is a huge benefit. Say you contribute $5,000 and are in the 22% tax bracket. The fact you don't pay tax on the $5,000 will save you up to 22% of that amount or $1,100. That's a lot of money. The tax savings makes investing enough for retirement easier.

What should you do with your retirement money instead?

Most people should not put their retirement money into savings for the same reasons I don't. Instead, it's a good idea to max out any employer matching funds by contributing to a workplace 401(k) if you're eligible. As a self-employed person, I don't have a 401(k) at work so I don't do this step. Matching funds means your employer contributes money when you do, so it's essentially free money your employer rewards you with when you save for retirement.

Next, consider whether you want to switch over to an IRA account, as an IRA can offer a broader choice of investment options for the rest of your retirement funds. If you happen to max out the IRA, then you can contribute your remaining retirement money for the year in your 401(k), as it has higher contribution limits.

The bottom line is, you want to be sure you're putting your money into something you can invest in so you can find assets -- like an S&P 500 index fund -- that stand a very good chance of giving you the returns you need to build retirement wealth. This is the surest path to a secure future, while putting retirement money into savings would mean limiting your ROI and missing out on the tax breaks that are designed to help you build your nest egg. You don't want to miss out, so open a brokerage account today for your retirement funds if you don't have one already.

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