Saving vs. Investing for Retirement – Is it Worth it to Save & Live Stingily?

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Retirement planning can be challenging, but it’s essential. It helps you determine how much retirement income you’ll need for financially stress-free golden years. 

The next major step in planning is deciding how to achieve your target retirement income. How do you intend to supplement your pensions? Cash savings, income-generating assets, or stocks? Financial experts recommend aiming for multiple streams of retirement income. But depending on risk tolerance level, most people are usually unsure whether to save or invest their retirement funds. 

The solution? Unfortunately, it’s not that straightforward. Individual circumstances, ideal lifestyle, years to retirement age, and other factors play a role in determining the best path for anyone. In this quick and easy guide, we’ll explore the possible outcomes for saving vs investing for retirement to help you out.                               

Cash Savings for Retirement

Some people opt to park their retirement funds in a bank savings account or a Cash ISA. Should you go this route as well? 

Cash savings can make a lot of sense if you’re close to retirement, say in five years. However, if you are a young professional saving for retirement through a cash ISA, it’s better to maximise your savings by opting for a lifetime ISA (LISA). You get free money from the government in addition to earning interest. It provides a 25% bonus up to a maximum of £1,000 in savings per year. 

Better yet, taking calculated risks to multiply your retirement savings through investing may be a better option for young people. We’ll look at that next.

Pros of cash savings for retirement: 

  • Financial Services Compensation Scheme (FSCS) protection for up to £85,000
  • Capital preservation
  • Flexible withdrawals before retirement, if needed
  • 25% bonus on deposits from the government, up to a maximum of £1,000 per year when using lifetime ISA (LISA)

Cons of cash savings for retirement: 

  • Low-interest rates that don’t keep pace with inflation reduce your savings’ purchasing power.
  • You might not save enough or earn substantial interest to live on
  • Contribution limits of up to £4,000 per year when using lifetime ISA (LISA)

 

Investing for Retirement

Putting your retirement savings to work can help you grow your nest egg while also ensuring you maintain spending power. However, different investment vehicles carry varying degrees of risk. Do you use an ISA to invest in stocks and shares, create your own portfolio, or buy assets that generate passive income? 

Most people prefer investing in ISAs because of the tax benefits. However, the key to investing for retirement is to strike a balance between risk and reward. Generally, the higher the potential rewards, the higher the risk, and vice versa. 

Understand your risk profile and choose investments that match your risk tolerance and earning expectations.

Pros of investing for retirement:

  • Greater returns over long periods that beat inflation
  • Opportunities for passive income even before retirement
  • A longer time frame allows you to recoup lost investment value if you don’t sell out
  • Huge variety of investment options that suit your goals and risk tolerance 

Cons of investing for retirement: 

  • No guaranteed returns due to market volatility 
  • You can lose part or all of your capital 
  • You must understand the assets and markets you’re investing in 

Conclusion

Retirement planning begins with maximising pensions and exploring options for generating additional income. Knowing your target retirement income goes a long way in helping you build a suitable pot and track your progress during your working life. If you want a financially stress-free retirement, you must factor in rising life expectancy and inflation rates. 

The most important thing to remember when deciding where to save your retirement funds is that there is no truly risk-free option. The most significant risk to cash savings is inflation, whereas capital loss is the greatest risk to investments.

Take the time to understand your risk tolerance level and look for ways to put your retirement funds to work based on that. It’s also essential to seek professional financial advice to create and implement a suitable retirement plan.

Saving vs Investing for Retirement FAQs

Is it Worth it to Save & Live Stingily?

Are you already living a stingy lifestyle? If you answered yes, it may be worthwhile for you. If you’re not living in a frugal way right now, you’ll probably not be okay with that lifestyle later. You might end up regretting your choices later on when little can be done. 

When we work, we become accustomed to a particular way of life that can be difficult to adjust to later in life. Consider your desired retirement lifestyle and instead pay the price to achieve it while you still have the opportunity.

Can I get rich by saving?

If you’re focused on building wealth, saving alone won’t make you rich. This is especially true if inflation exceeds the interest rate on your savings account. 

In fact, we have yet to meet anyone who became wealthy by saving. How your money grows determines the returns you’ll see.

How much interest will I earn on 1 million pounds?

The interest you’ll earn on one million pounds or any other amount depends on the interest rate offered by the account into which you are saving. With a 3% interest rate, depositing £1,000,000 in a savings account will earn you £30,000 per year, or £576.92 per week. If it’s simple interest, you’ll always earn that much interest each year unless you save more. 

If it’s compound interest, leaving your money untouched can mean accruing extra money fast even if you don’t save more. 

How does compound interest work? If you put £1,000,000 at a 3% compounding rate, you’ll earn £30,000 in the first year. During the second year, you’ll earn 3% on £1,030,000, which is £30,900. You earn interest on the previous years’ interest plus the principal. And the cycle continues. The longer this money is left untouched, the higher returns you’ll see eventually. Check out our post on Compound Interest here to learn more.

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