Here’s the real difference between a safe and aggressive retirement portfolio

There’s a reason some people stay away from the stock market: stocks are notoriously volatile. And if you load them into your 401(k) or IRA, you could see your account balance swing wildly from week to week or even day to day. And it’s a scary thing to see.

But one thing you need to understand is that while stocks can be volatile, they are also a solid vehicle for growth in your retirement savings. And if you play too carefully with your 401(k) or IRA investments, you could find yourself running out of cash as your senior years roll on.

You need stocks in your retirement plan

Investing in stocks can be out of your comfort zone, but here’s why it still pays to do so. The money you set aside for retirement today will gradually lose its purchasing power over time. It’s an age-old concept known as inflation, and no one is immune to it. Additionally, Social Security, which will provide part of your retirement income, has done a historically poor job of helping seniors maintain their purchasing power in the face of inflation, which means your retirement plan must do an even better job of compensating.

What return should you aim for in your 401(k) or IRA? The stock market has historically produced an average annual return of around 9%, so if you’re betting heavily on equities in your retirement portfolio, leaving only a small portion in bonds when you’re younger and gradually moving towards more bonds as you approach retirement, there’s a good chance your investments will generate an average annual return of 7%.

Suppose you can set aside $300 a month in your retirement plan over time. If you start saving when you’re 40 years out of the workforce and get that 7% return, you’ll end up with a total balance of $718,700.

But watch what happens if you decide to play it safe and stick mostly to bonds in your retirement plan. At this point, your investments may only give you an average annual return of 4%, which means saving $300 a month over 40 years will leave you with just $342,100. That’s a far cry from $718,700.

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Even if you’re the type of person who doesn’t have a particularly high tolerance for risk, it’s worth pushing yourself when it comes to your retirement plan. Remember, the money you save in your 401(k) or IRA is money you shouldn’t touch for years, and it gives you plenty of time to ride out the inevitable stock market downturns. and come out a winner.

Although bonds can be a more stable investment from year to year, you’re not supposed to touch your retirement savings from year to year – you’re supposed to leave that money alone until your time in the labor market is over. And while it makes sense to pile up bonds once you prepare to retire, you need to focus on building wealth during your working years – and stocks are the best tool to help you do that. reach.