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53% of the savers make up for pension errors

The average American thinks they will need about $ 1.7 million to retire comfortably, a study by Charles Schwab found. Considering the average amount baby boomers have saved for retirement is only $ 152,000, according to a report from the Transamerica Center for Retirement Studies, there is a significant gap between what workers have saved and how much they may need to last the rest of their lives. [19659002] To achieve big saving milestones, like saving at least $ 1 million for retirement, you might think that you simply need to add your savings and sacrifice to save as much as you can each month. But sometimes where you prepare your money is just as important as how much you save. And more than half of those preparing for retirement make this mistake that could be setting them up for financial failure.

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Where to put your money

Of those who save for retirement, 53% give up their money in a savings account, according to a survey by Morning Consult. At first glance, it may seem like a perfectly acceptable place to store your cash. After all, savings accounts are safe, your money is protected against a downturn in the market, and high-yield savings accounts can yield much higher returns than the average bank savings account.

However, savings accounts are a good place to park your cash for short-term needs, they are not the best option for long-term financial goals.

Even those savings accounts with the highest return have an interest rate of only 1

% to 2%, which may not even accompany inflation. In other words, if you stay in a savings account for several years or decades at the end, the money can actually lose value. In addition, it is much more difficult to save as much as you need for a pension when you earn a return of only 1% to 2%.

For example, say you have a goal of saving $ 750,000 within 67 years and you started saving at age 30. If you save your money in a savings account that earns 2% interest per year, you must Save just under $ 1,200 a month for 37 years to reach your goal. But if you had invested in the stock market and earned a 7% annual return, you would only need to save around $ 400 a month.

Many people shy away from the stock market because it seems inherently risky. Especially given that so many investors are still recovering from their losses during the Great Recession, you may be hesitant to risk your hard-earned cash by putting them in the stock market. But the stock market is not as risky as it may seem, and investing in it is the best way for workers to accumulate huge savings in a relatively short time.

Invest your cash while limiting your risk

Of course, you still need to be smart about where you can put your money to avoid losing everything. If you invest your entire life savings in a new technical warehouse that you have a gut feeling will become the next household name, and that company goes under, you will be in a plethora of financial problems. But by investing in relatively safe funds, you can limit the risk while still reaping the rewards of high yields.

Index funds and equity funds are good places to start. Essentially collections of tens or hundreds of different stocks, these funds allow you to spread your money over various investments to limit risk. That way, if one or a few of the shares in the fund decline in value, you will not lose a significant portion of your investment. Although there is still some risk involved (you will never be able to avoid risk entirely with the stock market), the money is still as protected as possible.

Exactly how much money you should add to stocks and what funds you should invest in depends on a few factors, such as your age and how comfortable you are at risk. The younger you are, the more risk you can afford to take on. You will probably earn higher returns, and if you experience any losses, you still have decades to collect your money before you leave. As you get older, you can weigh your portfolio more heavily against safer investments, such as bonds, to further limit the risk as you get closer to retirement.

It's also not as confusing or difficult as you might think to invest in stock market. In fact, all you need to do to start investing is to start saving in a 401 (k) or IRA. Especially with IRAs, you have a wealth of investment options to choose from, so no matter how comfortable or uncomfortable you are at risk, there is an option for you. And if you have access to a 401 (k) through your employer, you can probably transfer part of each paycheck to the pension fund, making it easy to invest.

This is not to say that savings accounts are not worth all. For short-term needs, such as building an emergency fund or saving on a home payment, they can be a great way to keep your money safe while still earning a solid interest rate. But for long-term financial goals, investing in the stock market is your best chance of establishing a strong, healthy nest egg.

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