Keeping cash in the bank costs retirement dollars
(MoneyWatch) More than 25 percent of Americans keep their long-term savings in cash instead of other types of investments. One result of this risk aversion: They are losing money.
When it comes to handling money they won't need for more than 10 years, 26 percent of Americans favor cash, according to a study by Bankrate.com. That is 3 percent more than those who put their money in real estate and 10 percent more than put their money in gold or other precious metals. Only 14 percent say stocks would be their choice and just 8 percent choose bonds.
According to Bankrate.com, the average money-market deposit account yields 0.11 percent, and the average five-year CD currently yields 0.78 percent. These slight returns, combined with the nation's current inflation rate of 1.8 percent, according to the Bureau of Labor Statistics, means people who leave their money in the bank are losing as much 1.69 percent their money each year.
One of the reasons that Americans prefer banks over other investment choices may be memories of what happened during the financial crisis of 2008, when real estate and stock values plummeted. Gold and precious metals may not be much more inviting right now. While commodities had seen their values skyrocket following the crisis, since January prices have dropped back down to where they were three years ago. It's easy to see why risk-averse savers might stay away from something as mercurial as this type of investment.
Even the fact that stocks are currently so high can dissuade investors from taking the plunge, for having been burned before, they fear the markets will soon drop again.
Unfortunately, taking such a conservative approach will likely have a huge negative impact when these people retire.
"Americans' not saving enough is well documented, but hunkering down in cash investments and settling for low returns will only magnify the problem of not having a sufficient nest egg to meet longer-range financial goals such as retirement," Greg McBride, CFA, Bankrate.com's senior financial analyst, said in a statement. "Other choices may not do the trick either, as real estate is not only very cash-intensive, but often illiquid. And precious metals spit out zero cash flows, with gains solely dependent on price appreciation."
In 2012, 55 percent of Americans said they saved $100 or less a month, according to a survey by CreditDonkey.com. Slightly more than 30 percent saved more than $100 a month, but only 14.6 percent said the saved more than $500 a month.
