Should you put your retirement savings in a bank account?
Where you put your retirement savings has a significant effect on how quickly your savings grow and when you can afford to retire. You’ve probably heard of IRAs and 401 (k), maybe even less common 403 (b) or self-employed retirement accounts, but what about a bank account?
It’s a popular choice, with 66% of workers saving for retirement outside of work using one of these accounts, according to a Transamerica poll. But keeping your retirement savings in a bank account could actually hurt you in the long run. Here’s why.
Bank accounts: the good and the bad
There are pros and cons of keeping your retirement savings in a bank account.
When you put money in a bank account – whether it’s a checking account, savings account, or certificate of deposit (CD) – you don’t have to worry about lose it due to daily market fluctuations. Your balance will only increase over time.
This security is a huge plus, especially for retirees and those nearing retirement who fear a possible stock market crash wiping out their savings. In that case, transferring money for their short-term expenses to a bank account might be a smart move.
Bank accounts will never give you the high returns you can get from the stock market. Even the best savings and CD accounts offer around 0.50% APY. If you put $ 10,000 in a savings account that pays 0.50% over 10 years, you will only have $ 10,511. If you had invested that $ 10,000 in the stock market, where it generated an average annual rate of return of 7%, you could have had almost $ 19,672 after 10 years. The difference in returns between the two accounts only grows over time.
Because your money won’t grow in a bank account as quickly, you have to contribute more money per month to retire when you want. This could delay retirement for some because they cannot count on significant returns on investment to help them.
People who hide a lot of retirement savings in a bank account might also experience issues with FDIC insurance limits. A bank account only carries FDIC insurance up to $ 250,000 per person per type of account. If you keep more than $ 250,000 in a bank account and the bank goes bankrupt, you could lose the surplus.
Better alternatives for your retirement savings
If you want to save for your retirement outside of work, a bank account is probably not your best option, unless you are very close to retirement. Even then, you should only keep the money you plan to spend over the next two years in a bank account. Leave the rest invested for now.
You can keep your money in a traditional or Roth IRA, which you can open with any broker, taxable brokerage account, or health savings account (HSA) if you have access to it. Each has its advantages and disadvantages.
IRAs offer a lot of investment options and they can be quite affordable, but you can only contribute up to $ 6,000 to an IRA in 2021, or $ 7,000 if you’re 50 or older. You must also have earned income during the year or be married to someone who must contribute to one of them, and you generally cannot withdraw your funds before age 59 1/2 without penalty.
Taxable brokerage accounts
Taxable brokerage accounts are not retirement accounts, so they do not offer the same tax breaks as retirement accounts. But there are also no limits on what you can invest in or how much you can contribute each year. You are also free to withdraw your money whenever you want. But for most people, it makes sense to hold onto your savings for at least a year. Then your income is subject to long-term capital gains tax instead of short-term capital gains tax. It can help you save money.
Health savings accounts (HSA)
Health savings accounts aren’t retirement accounts either, but they still serve the function. They are open to anyone benefiting from a health insurance plan with a deductible of $ 1,400 or more for an individual in 2021, or $ 2,800 or more for a family. Contributions reduce your taxable income for the year, and if you use the money for health care at any age, it’s tax free.
You can also make non-medical withdrawals, but you’ll have to pay tax on those plus a 20% penalty if you’re under 65. Individuals can contribute up to $ 3,600 to an HSA in 2021, and families can contribute up to $ 7,200. Some HSAs allow you to invest your contributions so that they can grow faster.
Protect your investment
Deciding where to put your savings is only half the battle. Once you’ve chosen an account, you also need to decide what to invest in. It’s important to make sure that you don’t put yourself at too much risk, but you also don’t want to be too conservative or you will get your job done. Stronger. A good rule of thumb is to keep 110 minus your age in stock. This means that you would invest around 70% of your savings in stocks if you were 40 and the remaining 30% in bonds. Over time, you move more of your savings into bonds to protect what you have.
You also want to make sure that you choose smart investments, preferably ones that have low fees. An index fund is a great option for most investors. It is a set of stocks that you buy together and is designed to match the performance of its underlying market index, such as the S&P 500. Consider adding one to your portfolio if you haven’t already.
Make sure you review your retirement strategy at least once a year. The best investments and the best retirement accounts for you are likely to change over time. Understanding all of the options available to you will help you make the right call.