Dispelling Investment Myths: Playing it Safe

The Myth: We can accumulate enough for retirement by saving cash and buying cash equivalents.

The Truth: Inflation robs cash, CDs and T-Bills of their purchasing power.

In 2014, a savings account typically paid 0.1% in interest. CD’s paid 0.7%. Inflation (see Financial Concept: Inflation) was a “modest” 1.7%. The money in a typical savings account or CD actually lost between 1.0% and 1.6% in purchasing power.

Let’s say you sock away $100,000 in cash for retirement, and inflation returns to 3% — the historical annual rate of inflation. That $100,000 effectively dwindles to $75,409.39 of purchasing power in ten years, $55,367.58 in 20 years, $41,198.68 in 30 years, and $30,655.68 in 40 years. Most people hope to spend 20, 25, 30 years or even longer in retirement. By “playing it safe” and putting your savings into CDs or T-Bills, etc., you’re allowing inflation to devour your retirement plans.