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The 1 reason you shouldn’t save for retirement

Am I crazy? Surely everyone needs to save for retirement (apart from bank robbers and oil barons)?

Of course, you’re right. Building up a retirement pot to help fund your later years is important.

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But I’m not crazy. And I still wouldn’t recommend saving for retirement.

Invest, don’t save

The reason for this is that saving means keeping your money in cash. And that means that your money isn’t working for you.

What I’d recommend is investing for retirement. That means converting your cash into an asset that will hopefully increase in value over time. Ideally, it would provide an income as well.

The cost of cash

There are two reasons why I think saving in cash for your retirement is a bad idea: inflation and low interest rates.

UK inflation was 2% in June, the latest figure available. By contrast, the best Cash ISA savings rate I can find at the time of writing is 1.87% on a three-year fixed rate deal. For easy access Cash ISA accounts, rates are lower.

This means that in real terms (after inflation), money saved in cash is falling in value each year.

Admittedly, things haven’t always been this grim for cash savers. According to data gathered by Barclays, over the last 100 years or so, savers have earned an average of about 1% above inflation.

However, stock market investors have earned about 5% per year above inflation over the same period.

Look at these numbers

What does this mean in terms of cold, hard cash? I’ve used the figures above to estimate how much you’d need to save each month to build up a retirement pot of £250k, adjusted for inflation, in 20 years’ time:

  • Cash saving per month: £941
  • Stock market investment per month: £608

These numbers suggest that saving in cash will require you to save 50% more than if you put your money into the stock market. Ouch.

Long-term profits

I should point out that the stock market isn’t suitable for short-term savings. In the short term — under five years — anything could happen to share prices. But history suggests that over longer periods, the market usually goes up.

Patient investors who are willing to ride out any short-term storms can usually do well.

Where to invest?

As you’ll guess, my choice of investment is the UK stock market. I’m building a portfolio of large, dividend-paying stocks that I can hold for years with minimal trading, to keep costs low. To avoid future tax bills, all my shares are in a Stocks and Shares ISA.

Most of my choices come from the FTSE 100. For example, I own shares of pharma giant GlaxoSmithKline, oil and gas firm Royal Dutch Shell and property firm British Land.

As I’m still working, I add cash to my portfolio each month and periodically use this to buy more shares. If this sounds a little too complicated, then an easier alternative would be to invest your cash in a FTSE 100 tracker fund each month.

Whatever you choose, I’d urge you to start as soon as possible. The earlier you start, the harder your money will work for you.

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Roland Head owns shares of British Land Co, GlaxoSmithKline, and Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Barclays and British Land Co. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.