Source: AARP, Facebook.
Continue Reading Below
Ask around, and you'll likely get the same answer: Saving for retirement isn't as easy as it sounds on paper.
Short of winning the lottery (and actually prudently managing your money following the win), saving money for retirement can be difficult because of life's unexpected shifts and expenses. Starting a family, buying a home, going to college, and medical expenses are just some of the curveballs we might have thrown our way during our lifetime that could turn what seemed like a straight and narrow road to retirement into a windy road.
Overall, Americans do a pretty poor job when it comes to saving money. According to research compiled by the Peter G. Peterson Foundation that took into account data from the 34-country Organisation for Economic Co-operation and Development, the net national savings rate in the United States as of 2012 was among the lowest of the most developed countries, at less than 1%. By comparison, France was north of 2%, Canada at nearly 4%, and Germany well above the 8% net national savings rate threshold.
Saving less can have dire consequences for Americans. It means they may have less time, less money, or less of both to generate sufficient income to retire comfortably and replace the income they would have generated if they were still working. Adding in some of life's aforementioned curveballs can make this balancing act incredibly tough.
Yet, in spite of not saving nearly enough for retirement, Americans could be making a far greater retirement mistake that's killing their ability to retire by a certain age, or comfortably, on their own terms. This mistake involves being too conservative with their retirement portfolio by focusing on capital preservation instead of genuine investment growth.
Continue Reading Below
Source: Flickr user David Goehring.
The single greatest retirement mistake
According to a new survey released this past week, BlackRock's Global Investor Pulse Survey, a majority of investors are holding cash or cash equivalents in their portfolios instead of investing their money in growth assets. In this context, a cash equivalent would be a money market fund, a U.S. Treasury bond, or a CD at a bank. Broken down by gender, 68% of women's portfolios were in cash and cash equivalents, and 59% of men's portfolios were allocated to cash and cash equivalents.
On one hand, I can certainly empathize with older adults in the pre-retirement (typically ages 55 to 64) or retirement-age bracket, as they do want to minimize their investment risks and loss potential. When you're in your 60s and 70s, you can't afford to lose half of your wealth betting on the next hot technology or drug in development. But, hitting pre-retirement or retirement age doesn't mean you should wave the white flag on investing altogether, either.
By leaning heavily on cash and cash equivalents, younger and older investors are strangling their ability to grow their real money over the long term. While CDs, money market accounts, savings and checking accounts, and even U.S. government bonds will net users a nominal return on their investment, usually ranging from 0.01% to perhaps the mid-2% range, their real money return, or what they've netted after inflation is factored in, is actually negative. Historically, inflation tends to average around 3%, so unless you've found the unicorn of all CDs, you're probably losing money to inflation right now by investing in these vehicles.
To be clear, this doesn't mean CDs, government bonds, or savings accounts are bad. There's a place for these investment vehicles in your retirement account -- just not a place where 59% or 68% of your funds are going toward them!
Source: AARP, Facebook.
Don't let conservative investing wreck your retirement
Wondering how you can fix what could be the single greatest retirement mistake of your life? It's easier than you might think.
The simple solution to ensure you don't run the risk of losing real money over the long run is adding exposure to the stock market to your portfolio. Historically, the stock market returns an average of 8% per year over the long run. Nominally, this provides the ability for investors to double their money around every nine years, which, over a 40- to 50-year history of working and saving, could lead to a substantial sum of money come retirement.
But, here's the best part, you don't need to be as great a stock picker as Warren Buffett, or as rich as Bill Gates to make this work for you!
If you don't have the time to devote to stock research, or feel intimidated by owning individual companies, there are solutions available for you. You can consider purchasing a mutual fund that'll likely charge you a management fee, but will spread your risk across potentially dozens of companies. By a similar token, you can add a bit more focus and control to your portfolio by purchasing index funds or ETFs. An index fund will track the return of an index such as the Dow Jones Industrial Average or S&P 500, while an ETF could allow you to take advantage of an entire sector, such as technology or financials.
If you are willing to research individual stocks, you can take advantage of dividend payments while allowing your investments to grow over time. Many of America's strongest companies pay a dividend to investors, allowing them to pocket profits along the way, or even supercharge their returns by reinvesting those dividends back into the same stock.
If you want to buy individual companies but don't have any idea on where to start, there's an answer for that, too: Tom and David Gardner's 13 Steps to Investing Foolishly, which will walk you through the basics of how to think like an investor and buy companies you can truly believe in.
The investment tools and history are on your side; you just have to be willing to make the long-term leap toward a more favorable retirement path.
The article This Is Possibly the Single Greatest Retirement Mistake You Can Make originally appeared on Fool.com.
Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.