About two-thirds of Americans who are saving for retirement with a 401(k) don’t think of themselves as investors. Nearly 64% see themselves as a “saver” instead, according to a recent Charles Schwab Retirement Plan Services survey of 1,000 401(k) participants.
You are investing if you’re contributing to a 401(k), usually via mutual funds that mix stocks and bonds, and it’s important to embrace your role as investor, financial experts say.
Why? Because investing in the market results in significantly higher average returns compared to depositing that money in a savings account. If you want to retire comfortably, you have to keep investing—and thinking like an investor can help.
“Saving is really for a goal that you’re hoping to reach between now and the next five years,” Farnoosh Torabi, host of the “So Money” podcast and cofounder of financial education pop-up She Stacks, tells Grow. For goals that are five years or more away, like retirement, you can afford to take more risks and should invest much more of your money in the stock market, she adds.
“With investing, time is really your best friend,” Torabi says. “The longer you have to invest, the longer period of time you have to ride out the ups and downs and the fluctuations in the market and arrive at your goal with more money than when you started.”
While it’s normal for stock prices to go up and down, the market is a proven winner in the long term: The S&P 500, the benchmark for U.S. stocks, has delivered average annual gains of about 10%. By comparison, the top savings accounts currently offer average rates just under 2.1%, according to DepositAccounts.com.
Say you invested even $25 a month for retirement over the next 30 years. Assuming a conservative 6% annual return, you’d have a bit more than $25,000. Stick that money in a savings account earning 2.1%, and you’d have half as much.
“Shifting your mindset from ‘saving for retirement’ towards ‘investing for retirement’ can help you to better understand that you are participating in the market when you contribute to a 401(k), and ultimately better help you reach your goals,” Steve Anderson, president of Schwab Retirement Plan Services, said in a statement.
Over half, or 54%, of respondents are using a savings account as their next step in preparing for retirement, according to the results of that Schwab survey. But that means you’ll accumulate less money when it comes to retire than you would if you instead focused on trying to add more to your 401(k) each month, and/or to your IRA, or individual retirement account.
Thinking like an investor means realizing that investing can help you come out further ahead and then committing to that course: Adding more to your retirement accounts whenever you can and remembering not to get spooked by moves in the market.
Twenty-somethings with a 401(k) contribute 7% of their paycheck to their account, on average, according to Fidelity, the nation’s largest retirement-plan provider. That’s a great start, especially if you’re getting an employer match, and trying to do even a little better when possible can help assure you a comfortable retirement. If you make $50,000, an extra 1% contribution works out to $500 per year—which could grow to nearly $83,000 after 40 years.
You’ll have compounding interest to thank for a majority of those gains, because you earn interest on both the money you invest and the returns you earn over time. That’s why it’s so important to start investing early, with whatever amount you can.
Find ways to cope with the market’s ups and downs and to avoid the cognitive biases that can derail your investing success.
“Look, if you have a 401(k), you’re an investor—and own that position, be proud of that,” Torabi says.
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