Retirement Savers Using Savings Accounts | American Funds

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FEBRUARY 27, 2017

A Savings Account Isn’t Likely to Provide Enough for Retirement, but 55% of Surveyed Retirement Savers Are Counting on It

The truth is that those who let retirement money sit in a savings account are missing out on the potential growth and tax advantages of retirement accounts such as 401(k)s and IRAs.

55% — Percentage of people who use a regular savings account to save for retirement

According to a 2016 survey conducted by consumer finance website NerdWallet, 55% of participants reported that they use a regular savings account for retirement funds. That number jumped to 63% for those between the ages of 18 and 34. While a number of those surveyed reported that they have a workplace retirement account and/or an IRA, more than half admitted they keep money earmarked for retirement in a savings account.

It’s no secret that savings accounts don’t offer much in the way of interest. In fact, reports that the average savings account offered an interest rate of just 0.08% as of mid-October. So why do so many choose such a low interest-bearing option?

Arielle O’Shea, an investing and retirement specialist for NerdWallet, notes that young people just getting started on saving might like the idea of having one pot of money they can easily access to achieve a variety of goals.

Millennials, in particular, might want to consider opening a Roth IRA. People who expect to be in a higher tax bracket at retirement age might see a greater benefit in having tax-free withdrawals later (rather than getting a tax deduction on contributions now). The good news is that it’s not too late to make a regular or Roth IRA contribution for tax year 2016. The deadline is April 18, 2017.

For those who max out their 401(k) and IRA contributions in a given year, O’Shea suggests establishing a taxable brokerage account for retirement savings. Brokerage accounts provide access to investments with returns that have been historically higher than the interest rate offered by a savings account.

Christopher Gies, senior vice president, advisor education and sales force development at American Funds, has talked to millennials and Gen-X investors. “They often make large allocations to low interest-bearing instruments like savings accounts and U.S. Treasury bills because they worry that investing in common stocks is too risky,” he says.

“However, if one views the after-inflation returns from savings accounts or other short-term fixed income investments over the typical retirement investor’s time horizon of 30 to 40 years, you will find that they seldom keep pace with inflation. A diversified portfolio of equity mutual funds, such as those managed by American Funds, can provide returns well in excess of inflation when investments are maintained for the long term.”

Consider this: From 2000 to 2009, inflation grew by an annual average of 2.54%. From 2010 to 2016, the annualized increase for inflation was 1.6%. A savings account, even one with an interest rate of more than 0.08%, isn’t going to bridge the gap for retirement savers. By comparison, the Lipper Growth & Income Funds Index returned 5.09% over the past 10 years (as of January 31, 2017). Over the same period, the average annual total return for a 10-year Treasury bill was just 2.84%.

“The real risk is not the rise and fall of equity markets, it is the likelihood that without actively managed common stocks, most of us couldn’t reach our most important long-term goals in life,” Gies concludes.

Results of the Lipper index do not reflect sales charges. Lipper indexes track the largest mutual funds (no more than 30), represented by one share class per fund, in the corresponding Lipper category. Source: Thomson Reuters Lipper.

Source: “NerdWallet 2016 Financial Health Report.” December12, 2016.

Past results are not predictive of results in future periods.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.