Where Americans Are Keeping Most of Their Savings — And Why It’s a Problem
You’ve likely seen headlines about how America has a savings problem. Many Americans couldn’t even put together $1,000 to pay off an emergency expense, and most are coming up short in terms of retirement planning as well. But one of the most alarming statistics, and one that is less frequently cited, is where those who are saving are actually putting their money. According to results from the Equitable Consumer Finance Survey for Q1 2024, “Seven in 10 surveyed Americans use their checking and regular savings accounts to put aside money for the future, including retirement.”
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Here’s why this is a problem, and what you should do instead.
Most Savings Accounts Have a Negative Real Yield
According to the Equitable survey, 70% use checking or regular savings accounts to set aside money for the future. This is bad planning on a number of fronts. First off, money for any long-term purpose, such as retirement, should never be kept in a savings account. The net real return for savings accounts — which is determined by subtracting taxes and the rate of inflation from an account’s yield — is negative. This means that if you put all your retirement money into a savings account, by the time you retire, you’ll have less purchasing power than when you started.
Even worse is the fact that the respondents to the survey didn’t even choose high-yield savings accounts, which provide a return of 10 times or more of what a standard savings account offers. According to the Federal Reserve, for example, the average savings account rate in America is currently just 0.46%, but many high-yield savings accounts pay over 5%. That’s a much better option than keeping your money in a traditional savings account, but it still likely has a low or negative real rate of return after you factor in inflation and taxes.
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Most Checking Accounts Don’t Provide Any Return at All
In terms of a holding place for long-term savings, a checking account is one of the few options even worse than a regular savings account. This is because most checking accounts don’t provide any return at all. Even “interest-bearing” versions typically pay a minimal amount, far less than even the average savings account yield — 0.08%, according to the Federal Reserve.
Where Should You Keep Your Savings Instead?
Few Americans are saving as much as they will need, and of those that are, nearly three-quarters aren’t keeping that money in a productive account, according to the Equitable survey. Here are some better options.
Emergency Fund/Short-Term Savings
There is a time when you should keep your money in a savings account, and that is if you are building an emergency fund or saving for short-term goals, like buying a house. But even then, a traditional savings account is not a solid option. Use a high-yield savings account to earn a decent rate of return that’s many multiples of what a traditional bank account will pay you.
Retirement Savings/Long-Term Savings
All of your long-term savings, however, should not be in a savings account of any type at all. For goals like your retirement nest egg, you’ll need to earn a real return, the type that only growth investments can provide. If you have at least a 10-year investment horizon, the bulk of your portfolio should be in equities, according to most experts. This is because the long-term return of the S&P 500 is roughly 10%, or more than double the long-term inflation rate.
While some feel this is risky, the real risk is outliving your money which is not earning a real return. Although stocks can be volatile over the short run, the longer you keep money in equities, the less risky they become. The S&P 500, for example, has never lost money over any rolling 20-year period, in spite of some vicious bear markets along the way.
How Big of a Difference Could This Make?
If you compare the return of a savings account and the stock market over a period of 20 or 30 years, the difference is startling, even with a high-yield savings account.
Imagine you could sock away $300 per month into a high-yield savings account that pays a 5% APY. After 30 years, you could potentially have about $250,000 in your account.
If you instead boost that return to the 10% long-term average of the S&P 500, you’d have closer to $678,000. This is a 171% greater return, resulting in an additional $428,000 in your nest egg.
It’s also important to note that the current 5%-ish yield on many high-yield savings accounts is exceedingly high, historically speaking. Those rates are likely to tumble over the next few years as the Federal Reserve begins to cut interest rates, something it anticipates doing at least three times in 2024 alone. Thus, banking on a long-term savings rate in the 5% neighborhood is optimistic at best. You’re highly likely to fall short of your retirement savings goal if you’re expecting this type of long-term return.
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This article originally appeared on GOBankingRates.com: Where Americans Are Keeping Most of Their Savings — And Why It’s a Problem
