You can’t “Save” for retirement

A few months ago we published a blog post that looked at the difference between saving and investing. Today we continue that theme by looking at how it’s practically impossible for someone to ‘save’ for retirement.

Before we show why you probably can’t save for retirement let’s quickly go over the difference between saving and investing again. When you save you put money aside, maybe in a safe or hidden under your mattress for example, or place it in a savings account that at this time will get you somewhere between 0.3-0.5 percent interest. When you invest, you use your money to purchase investments such as stocks, bonds, mutual funds, or ETFs. By investing, you’re attempting to make money with your money to maintain purchasing power and grow wealth over time.

You can’t ‘save’ for retirement, but you can invest for retirement. Let’s look at some basic math to see why simply saving for retirement is beyond the realm of most people.

Often when people talk about retirement they talk about that magic number of $1 million. We’re not saying that’s enough to retire on, but it is a number used a lot and easy for most people to comprehend. It is not possible for the average person to ‘save’ $1 million.

Let’s say you’re 20 years old and you want to ‘save’ $1 million for retirement when you’re 60 years old. That gives you 40 years. Let’s look at the math:

$1,000,000/40 years = $25,000/year

That means to hit your $1 million goal you would need to save $25,000 per year for 40 years. In my first real world job when I was 22 years old my starting salary was $24,000, so I wasn’t even close to being able to save $25,000 a year.

Let’s breakdown that number even more into months.

$25,000/12 = $2,084/month

How often do you have an extra $2,084 to save at the end of the month? Probably not very often, if ever.

This is why investing is so important to your financial future. Whether it’s retirement, post secondary education, or a home, simply saving is not enough to get there. Investing needs to be a part of your financial plan to accomplish these goals.

Before making any investment always make sure it fits your investment goals and risk tolerance. Do not take on more risk than you can carry, and do not invest more than you can afford to lose. While investing for retirement is important make sure you properly balance the investments you’re making and your risk to ensure it does not negatively affect your current standard or living.