CDs vs. stocks for retirement

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A recent study by Wells Fargo peered into Americans’ feelings about retirement and found that 68 percent of respondents are not confident that the stock market is the best place to invest their retirement savings. Nearly half say that they would prefer to invest in CDs instead of stocks and mutual funds for retirement.

From the press release for the survey, titled “80 Is The New 65 For Many Middle Class Americans When It Comes To Retirement, Wells Fargo Retirement Survey Finds”:

When Americans were asked what they would do to invest $5,000 for retirement – invest in a CD or the stock market – 50% of respondents said “invest in mutual fund or stocks” and 45% said they would purchase a bank CD. The percentages flipped when people age 25-29 were asked the question.

With five-year CD rates hovering at just 1.19 percent according to Bankrate’s most recent weekly rate survey, investing in CDs and excluding stocks from a retirement portfolio could add a few years to a saver’s retirement plan as well as dramatically increase the amount they need to save.

Savers willing to be more aggressive with their investments run the risk of losing part of their savings but also may get better returns.

Over the past 20 years, between Nov. 15 1991 and Nov. 15 2011, the Standard & Poor’s 500 index increased about 225 percent. But if you narrow the range to just the past decade the returns are decidedly lower — the index is up 10.12 percent from the same date in 2001.

Of course, if you further narrow in on the past five years, the returns are incredibly varied. Focusing on a short period of time that also happens to be one of the most turbulent periods in recent history would be enough to send anyone running for the safety of CDs.

That may be the case with today’s young investors who have experienced all of the downsides of the stock market in recent years: terrifying prolonged drops, giddy highs and abrupt reversals.

Recent studies have shown that younger workers are decidedly more risk-averse than older workers. For instance, the Merrill Lynch Affluent Insights Quarterly Survey released in July 2010 found that more investors between the ages of 18 and 34 said that their risk tolerance was low than did investors between the ages of 35 and 50 — with 52 percent of the younger generation identifying as having low risk tolerance compared to 45 percent of the older generation.

While some caution may be warranted, investing too conservatively at a young age can have a negative impact on the overall amount saved by the time a person retires. Over a long period of time, stocks will earn more than conservative investments but in the short-term, are much more volatile.

In order to take advantage of the long-term potential of the stock market while diminishing the impact of short-term stock market swings, investors can spread their investing dollars among several different types of investments. Rather than being forced to choose between very safe investments and extremely risky ones, investors have a smorgasbord of options in between the two poles.

Choosing from a range of investments will likely help quell stock market uncertainty while helping workers hit their retirement goals.

If you had to pick between putting $5,000 in a CD or the stock market for retirement five years, which would you choose?

It’s kind of an unfair question because “for retirement” could mean two years or 20, so let’s narrow it down to a five-year window. In the Wells Fargo survey I didn’t see a mention of a specific time frame besides for retirement, which makes it even more notable that such a large percentage of the under-30 set gravitated to CDs.

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