Why You Need to Invest to Save Enough for a Secure Retirement – The Motley Fool

Posted: March 31, 2020 at 8:45 am


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Just over half of all Americans owned stocks in 2019, according to a Gallup poll. Unfortunately, 35% of Americans don't have any equities and thus have no exposure to the market.

With the stock market experiencing major ups and downs in recent weeks due to the COVID-19 pandemic, it may seem odd to read an article that laments the fact more Americans aren't invested. But even in times of economic uncertainty, and even when the market falls, investing in stocks is still your best bet if you want to build wealth.

In fact, it is very difficult (and perhaps impossible) for the average person to build a big enough nest egg without putting a substantial amount of money into the stock market.

Image source: Getty Images.

While there are times when the market goes down, including in recent weeks, historically it has performed better than most other types of investments.

In fact, in a stock-heavy investment portfolio, you can reliably expect around a 7% annual return over timeafter accounting for inflation.This doesn't necessarily mean you'll make 7% in a particular year. Some years you may lose money, and in others you'll make more. But over the long term, expecting a 7% average annual return is reasonable given past market performance.

If you opt out of investing in stocks, though, or you invest only a small percentage of your portfolio in them, your projected returns are likely to be much lower. That means you have to save a whole lot more.

In fact, the table below shows how much more you'd have to invest per year to save $1 million by age 65, assuming you started at age 30.

Annual Return

Amount You Need to Save Annually

2%

$20,050

3%

$16,575

4%

$13,600

5%

$11,075

6%

$8,975

7%

$7,250

Table calculations: Author.

For most people, even saving $7,250 a year is a challenge, and putting aside more than $20,000 is downright impossible. To ensure you can build the necessary nest egg while saving an affordable sum, you simply have to put your money to work for you. That means investing in the market and earning a reasonable rate of return.

While you need money invested, you don't want too much -- you must balance risk with reward. A diversified portfolio that includes stocks and other investments is the best way to ensure you'll have enough in your later years.

The level of risk you should be exposed to varies depending on how soon you need the money. If you're retiring soon, you don't have time to wait out market downturns, so you'll want less money in stocks. If you're retiring decades from now, you'll want to invest more money in the market since you have a longer timeline for your investments to grow.

One good technique for deciding what percentage to put into the market is to subtract your age from 110. If you're 20, you should have 90% of your portfolio in the market; if you're 80, you should have just 30% in stocks.

Maintain this asset allocation even during volatile times and keep investing (and holding solid investments) even during market downturns. By buying and holding over the long term, you maximize your chances of earning or exceeding a 7% average annual return.

If you're among the minority of Americans with no money in the stock market, you should change that. And if you have some funds invested, but not enough, you may also want to consider re-allocating your assets. You don't need to wait until the market stabilizes or hits bottom, since there's no reliable way of timing it.

While it can be scary, and there is a risk associated with investing, there's also a downside to keeping your money out of the market. It may be safe, but it's unlikely to grow enough to give you the nest egg you need.

Don't pass up the chance for a secure future as a senior because of your fear of investing, even during these scary times.

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Why You Need to Invest to Save Enough for a Secure Retirement - The Motley Fool

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March 31st, 2020 at 8:45 am

Posted in Retirement