Investing for retirement is a lifelong project, and it’s a challenging one, with many workers amassing account balances that are too low to support them.
Unfortunately, some Americans are making the process of investing for the future even more difficult than it needs to be. And part-time workers are especially likely to be among this group. Here’s why.
Part-time workers could be making a retirement savings mistake
According to a recent study by the TransAmerica Center for Retirement Savings, a surprising number of people may be using the wrong accounts to save for retirement. Specifically, many people are saving in a regular bank account rather than in a special tax-investment account or account that allows them to invest and earn potentially higher returns.
Part-time workers are much more likely than full-time workers to be saving in bank accounts for retirement. A total of 74% of part-time workers indicate they’re using a bank for retirement savings, compared with 64% of full-time workers.
While it might be OK for these employees to save some funds in a bank account so they have liquid savings if they’re nearing retirement, TransAmerica data suggests many people are forgoing other, better accounts, such as 401(k)s and health savings accounts (HSAs), in favor of investing with their bank. And that’s a problem.
Why a bank account may not be the right way to save for retirement
Putting money into a bank account for retirement typically isn’t the best approach, for a variety of reasons.
First, if workers aren’t using a tax-advantaged retirement plan, they’re missing out on a major opportunity to get government help. While part-time workers may not have easy access to a workplace 401(k) that allows pre-tax contributions, IRAs and HSAs are often an option. They provide valuable tax benefits that could be worth thousands of dollars per year, as IRAs allow you to make deductible contributions, while HSAs allow both deductible contributions and tax-free withdrawals if the money is used for medical services.
Second, bank accounts often provide low or no returns. If you’re earning no interest on your money or earning interest at a low rate, you could actually see the value of your savings erode due to inflation — especially right now, when inflation is surging.
Putting money into a brokerage account creates the potential for much higher returns. In fact, even if you know nothing about investing in the stock market, you could reasonably expect to earn around 10% average annual returns over time by simply investing in an S&P 500 index fund. No bank will provide returns anywhere near that amount.
Money in a bank account is also more likely to be spent on other short-term needs rather than actually saved for retirement.
What’s the best way to invest for retirement?
Tax-advantaged retirement plans, such as 401(k)s, IRAs, and HSAs, are a far better choice for most people than investing for retirement using a bank account. And part-time workers should have access to an IRA, as that can be opened with any brokerage firm, as well as to an HSA if they have a qualifying high-deductible health insurance plan.
If you’re in the 22% tax bracket and you make a $5,000 contribution to an account that allows pre-tax contributions, you could save as much as $1,100 in taxes because of your investment. If your income isn’t too high, your investment could potentially also entitle you to claim the Saver’s Credit and save thousands more on your tax bill.
If you’re a few years away from retirement and want enough cash to cover two or three years of living expenses, you could put that money into a high-yield savings account. But outside of that situation, your money likely belongs in a tax-advantaged brokerage account, where you can invest and put it to work building a more secure future.