Life expectancies have gone up rapidly over the past century. The number of people worldwide who reach the “traditional” retirement age of 65 is increasing in many countries. The United States is no different. Many financial talking heads point out that it’s important to save for retirement. However, this statement can be problematic.
Saving Money
Saving money is a good thing. Most families need to have some money stashed away when emergencies arise, and they will arise. The ability to pay cash for these problems is a great way to avoid going into debt. This is important because holding debt and paying hundreds in interest every month is one reason many Americans are unable to build wealth.
However, saving money for the future will never allow that money to grow. The Great Recession and the coronavirus pandemic have led to long-term periods with interest rates near zero. This means that a $1,000 investment in a savings account will likely get a few pennies in interest each month. Such “investments” will lose money over time because of the impact of inflation. $1,000 today will buy more than $1,002 will in a couple of years.
Investing
Having a cash stash is a good thing, but having a stash of investments can be a better thing. Investing in real estate or equities can produce a steady stream of cash flow. For example, there are dividend funds that chase high-yielding stocks. The yields are not usually extremely high sucker yields, but these funds can return 3% or 4% with dividends each year. Those in the accumulation phase of their investing journeys can reinvest the $30 or $40 they receive in dividends for each $1,000 invested each year. These investments can be a great way to beat inflation and actually see a nest egg grow in real terms over time.
Those who live into their 60s will usually want to slow down their work schedules at some point. Saving money is unlikely to make this happen because of inflation. That’s why it’s important to start investing as soon as possible. Reinvesting interest and dividends in equities can be a great way to build wealth and allow for a comfortable retirement.