Saving vs Investing For Your Retirement

I am off on paternity leave for a little while as my wife and I welcome our baby boy into the world. Since I receive many inquiries about guest posts, this seemed like the best time to finally share some of our readers’ work. If you are interested in guest posting on Lacking Cents, you can read our guidelines and submit your proposed topic here.

Our first guest post comes from Andrew Altman from Slickbucks.com. Andrew’s goal with Slick Bucks is to help folks learn to manage money cleverly, and how that clever management can make you wealthier. He has learned a lot from his years of personal and professional experience and is hoping to help others achieve the freedom of wealth.

He has a great article to share to assist with retirement planning. Investing is one of my favorite topics, and statistics continue to prove that investing early in life has the most long-term benefits.

So with that, take it away Andrew! ~Matt

Just about every financial advisor will tell clients to save for retirement. What does this advice mean, however?

Some people think that saving for retirement involves stashing away $1 million in a bank account or under a mattress. Saving for retirement invokes thoughts of investing in the stock market to others.

Which is a better path to take? After all, many retirees saw the value of their previous investments drop by half, or even more, at the height of the Great Recession in 2008 and 2009. This experience no doubt put fear into the minds of many people.

Savings Accounts

Positives

Saving money in a traditional savings account at a bank or credit union is a relatively safe investment as long as deposits are kept below the $250,000 that is insurable through the FDIC. These accounts will generally pay interest to those who deposit money in them.

However, when rates are low, as they have been for the past several years, the interest payments are not terribly high. But you are not likely to lose your money in a savings account.

Negatives

While you’re not likely to lose any actual dollars like investments can, you can lose in another way. $100 may only be about $105 in five years (at the current 1% interest rates), meaning your money has limited growth potential.

And $100 will probably buy less in five years than it would today. This is a result of inflation, which has generally been 2 percent per year or higher since World War II.

Therefore, your purchasing power would probably go down just about every year if you just save in a savings account. Certificates of deposit are not much better.

Investing For Retirement

Investing for your golden years usually involves purchasing stocks or stock funds, although bonds can also make up a part of the investments. Additionally, purchasing rental property is another potential avenue for investment.

While some might find investing in stocks to be a scary proposition, there are actually risks tied to losing purchasing power when putting money into a savings account instead.

Therefore, investing for retirement is a good idea. Especially when it’s done over a long period of time.

Setting Up An Account

To invest in equities, you’ll either need an account with a brokerage or with an entity like Computershare, which allows for direct stock purchases from a range of companies.

After choosing a brokerage, you’ll need to fund the account with money from a savings account, a direct deposit from your paycheck, or some other source of funds. Then, you’ll be able to make your purchases.

Stocks Or Funds?

After opening the account, you’ll want to decide whether to buy individual stocks or mutual funds/ETFs. There are literally thousands of individual stocks that you can buy. Some are great investments. Others are not.

When looking at individual stocks to buy, you’ll want to look for companies that have great revenue streams and nice net incomes. Ideally, the company will have a history of growing over time, as this growth is a sign of a great company to invest in.

Buying only one or two stocks for retirement is not a good idea. This would not provide enough diversification to protect you should one of your two investments go under.

Mutual funds or Exchange Traded Funds (ETFs) provide an automatic level of diversification. Effectively, you’re buying a basket of companies when you purchase one of these vehicles for investment.

If one goes belly-up, it will hurt your bottom line a bit, but it will not hurt as much as it would if the company made up 50% of your portfolio. If you choose to purchase individual stocks, it’s a good idea to buy 20 or more over time to help manage the risk of losing everything with a single bad choice.

How Investments Build Wealth

Investments build wealth in two ways. The first is through capital appreciation. This occurs when the price of the stock goes up over time. Companies that increase revenues and profits will generally see the price of their stock increase. Making money through capital appreciation requires investors to actually sell shares to realize the gains and access the cash proceeds.

The second way that stocks can build wealth for investors is through dividend payments. Dividends are cash payments for each share of a company that an investor owns.

The cash from the dividends can then go toward increasing monthly income or toward buying additional shares in either the company or the fund that paid the dividend — or an entirely different stock. Buying additional shares should also increase overall dividend income over time.

Risks With Equities

While stocks can appreciate in value or pay dividends, it does not mean they are without risk. Investing in solid companies does not run the same risk of losing capital to inflation like a savings account, but the price of the stocks can go down — even as low as $0. If a company goes bankrupt, those who have invested in the company’s stock will lose most, if not all of the money that they’ve invested.

Additionally, the price of a stock can go down during a recession even if the underlying fundamentals of the company are strong. In this latter example, the prices will generally turn around and reach higher levels after the economy improves, if history repeats itself.

Conclusion

Investing for the future and preparing for retirement is an important step that people should take. The earlier an individual starts this process, the more likely he or she will see success.

Investing for retirement generally provides a larger nest egg than simply stashing money in a savings account that earns less than 1 percent annually because the stock market provides much higher returns over the long run.

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2017-06-12T14:38:37+00:00 June 5, 2017 6:15 am|Categories: Guest Post|Tags: , |2 Comments

2 Comments

  1. MyStrategicDollar June 17, 2017 at 3:39 pm - Reply

    oh man, investing all the way! Saving money is secure but you lose money over time and it’s just not worth it. I have 3-6 months living expenses set aside in an AMEX Savings account that pays 1.05% (much higher than all other banks and the highest I’ve seen except for entry level periods) but other than that I invest the rest in index funds or real estate.

    • Matt @ Lacking Cents June 18, 2017 at 9:26 am - Reply

      Definitely the best long term strategy if you want any hope of a long, secure retirement.

      Our emergency fund strategy is the same…highest interest rate savings account with 6 months of living expenses. Wish the returns were higher than 1%, but I continue this strategy to maintain peace of mind for our family.

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