If your retirement investing strategy relies on putting regular money in a cash savings bank account, you could be making a BIG mistake.
Bank interest rates have recently lurched down another notch. The highest rates I can find are around 2.75% for regular saver accounts and some current accounts. But you can’t save much with those because of upper limits for monthly and total sums saved. And, often, the deals only last for a year before reverting to very small interest rates.
Retirement investing needs gains above inflation
Indeed, the landscape is barren when it comes to investing in bank accounts for saving cash. And one of the main dangers is the value of your money in cash accounts will likely lose ground against general price inflation.
Instead of declining, your retirement savings need to work hard for you and increase in value over time above the rate of inflation. And to achieve that, you need a higher rate of annualised return.
Many people turn to the stock market for these higher returns. Over the long haul, shares in general have outperformed the other major classes of assets, such as property, bonds, and cash savings.
Rising share prices can combine with income from shareholder dividends to produce annual returns that beat the interest rates paid by cash savings accounts. And if you compound those gains by ploughing them back into shares, your pension pot could grow nicely, over time.
One way to get involved with share-backed investments is to put regular money into a fully-managed pension fund. If your employer has a workplace pension scheme, that’s usually a good option. Indeed, your employer will often add extra money on top of what you pay in each month, which can be a big boost to your pension pot.
On top of this, saving in a pension scheme is tax-efficient. But if you can’t get into a workplace scheme, you can simply invest in a fully-managed personal pension on your own. And that’s still a good deal when it comes to tax.
Controlling your own stock market investments
If you want more control over the investments going into your pension pot, you can choose a Self-Invested Personal Pension (SIPP). Or you can go for a Stocks and Shares ISA. Both have tax advantages and are worth considering.
Within those ‘wrappers’ you can invest in managed funds of your choice. Or you can choose low-cost index tracker funds, such as those that follow the fortunes of the FTSE 100, FTSE 250, America’s S&P 500, and many others. And if you’re prepared to work hard at research, you can invest in the shares of individual companies too.
Some retirement investors build a core of well-diversified funds in their portfolios and add a few shares of individual companies as well. Individual company shares can help you beat the returns from the general stock market, if you choose carefully.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.