savings for retirement in cash

Why you may not want to keep your savings for retirement in cash

Holding those retirement savings in cash is often a bad idea. Here’s why.

The future is uncertain and unpredictable, so it’s important to start planning for your retirement well before you punch out from work for the last time. The last thing you’ll want to be doing in your retirement years is worrying about money, so you can save yourself a whole lot of stress and ensure a comfortable retirement if you get your finances in order well in advance.

There are many disadvantages to holding all your retirement savings as cash, so let’s take a look at how you can save and invest to ensure a secure financial future.

What are the disadvantages of keeping retirement savings in cash?

The main argument spouted by people who keep their retirement savings in cash is that you keep your money where you can see it and where you can easily access it. Instead of handing it over to some super fund or investment manager and letting them fritter it away, you have control over your cash — and it’s not going anywhere.

However, the reality is that there are several very important disadvantages to saving for your retirement in cash, and they can have severe implications for your financial future. Some of those disadvantages include:

It’s not safe

This is a pretty obvious weakness, but one that’s still worth pointing out when it comes to stashing away a pile of cash at home. Holding large sums of cash in or around your home is a pretty stupid thing to do. It makes you a prime target for thieves, while there’s other risks like fire and flood that are also worth considering. If your stash of cash is stolen or goes up in smoke, there go your plans for a safe and secure retirement.

Inflation

The cost of living goes up every year thanks to inflation, on average by about 3 per cent. But while the cost of goods and services rises year after year, if your savings are in cash they simply sit there and don’t grow at all. In other words, the value of your money effectively decreases as time passes. That’s why it’s important to find a way to make your savings work harder for you.

There could be far better returns available elsewhere

Even if you put your money into a high-interest savings account, the highest interest rate you could access at the time of writing was 3.50% p.a. Compare that with Australian residential property and equities, which in the 20 years to 2015 years delivered average returns of 9.8 and 9.5% p.a. respectively.

Rates last updated December 4th, 2016
$
$
months
Maximum Variable Rate p.a. Standard Variable Rate p.a. Bonus Interest p.a. Fees Min Bal / Min Deposit Interest Earned
ME Online Savings Account
Ongoing, variable 3.05% p.a. rate when you link to a ME Everyday Transaction account and make a weekly purchase with your Debit MasterCard using tap & go. Available on balances up to $250,000.
3.05% 1.30% 1.75% $0 $0 / $0 Open More
RaboDirect High Interest Savings Account
Introductory rate of 3.20% p.a. for 4 months, reverting to a rate of 2.05% p.a. Available on balances below $250,000.
3.20% 2.05% 1.15% $0 $0 / $0 Open More
ING DIRECT Savings Maximiser
Ongoing, variable 2.75% p.a. when you link to an ING Orange Everyday bank account and deposit $1,000+ each month. Available on balances up to $100,000.
2.75% 1.60% 1.15% $0 $0 / $0 Open More
Bankwest Hero Saver
Ongoing, variable 2.65% p.a. rate when you deposit at least $200 each month and make no withdrawals. Available on balances up to $5,000,000.
2.65% 0.01% 2.64% $0 $0 / $0 Open More
AMP Saver Account
Introductory rate of 2.55% p.a. for 4 months, reverting to a rate of 2.10% p.a. Available on balances below $5,000,000.
2.55% 2.10% 0.45% $0 $0 / $0 Open More
Australian Unity Easy Saver
Introductory rate of 2.90% p.a. for 4 months, reverting to a rate of 1.70% p.a. Available on balances below $250,000.
2.90% 1.70% 1.20% $0 $0 / $0 Open More
ANZ Online Saver
Introductory rate of 2.85% p.a. for 6 months, reverting to 1.25% p.a. Available on the entire balance.
2.85% 1.25% 1.60% $0 $0 / $0 Open More
Westpac eSaver
Introductory rate of 2.71% p.a. for 5 months, reverting to a rate of 1.25% p.a. Available on the entire balance.
2.71% 1.25% 1.46% $0 $0 / $0 Open More
HSBC Serious Saver
Introductory rate of 2.25% p.a. for 4 months, reverting to a rate of 1.60% p.a. Available on balances below $1,000,000.
2.25% 1.60% 0.65% $0 $0 / $0 Open More
St.George Maxi Saver
Introductory rate of 3.00% p.a. for 3 months, reverting to a rate of 1.05% p.a. Available on balances below $5,000,000.
3.00% 1.05% 1.95% $0 $1 / $1 Open More
BankSA Maxi Saver
Introductory rate of 3.00% p.a. for 3 months, reverting to a rate of 1.05% p.a. Available on the entire balance.
3.00% 1.05% 1.95% $0 $1 / $1 Open More
Bank of Melbourne Maxi Saver
Introductory rate of 3.00% p.a. for 3 months, reverting to 1.05% p.a. Available on the entire balance.
3.00% 1.05% 1.95% $0 $1 / $1 Open More
BankSA Incentive Saver Account
Ongoing, variable 1.85% p.a. when you make at least one deposit each month and no withdrawals. Available on the entire balance.
1.85% 0.01% 1.84% $0 $0 / $0 Open More
Bank of Melbourne Incentive Saver
Ongoing, variable 1.85% p.a. when you make at least one deposit and no withdrawals each month. Available on the entire balance.
1.85% 0.01% 1.84% $0 $1 / $1 Open More
ANZ Progress Saver
Ongoing, variable 1.91% p.a. when you link to any Australian everyday bank account and deposit $10+ each month. Available on the entire balance.
1.91% 0.01% 1.90% $0 $10 / $10 Open More
Westpac Reward Saver
Ongoing, variable 1.85% p.a. when you deposit at least $50 and make no withdrawals each month. Available on the entire balance.
1.85% 0.01% 1.84% $0 $0 / $0 Open More

Terms and conditions

In order to access the best possible interest rate on a savings account, in many cases you will need to satisfy certain eligibility criteria. For example, you may need to deposit a certain minimum amount each month and not make any withdrawals. Fail to satisfy these conditions and your savings will effectively earn zero interest for that particular month.

Diversification is key

If your financial planner advises you to diversify your portfolio, they’re basically telling you not to keep all your money in the one place. Diversifying allows you to create a safe investment portfolio with a possibility of better returns – so while you shouldn’t necessarily pump all your money into high-risk investment options, you shouldn’t hold all your savings in cash either.

Some cash can be a good idea

However, just because there are many disadvantages to an all-cash retirement approach doesn’t mean you shouldn’t keep some of your savings liquid. Setting up an emergency fund in an easily accessible savings account is always a good idea in case something goes wrong and you need funds quickly. Having at least six months worth of living expenses available can help you out of a tight financial jam if an unexpected medical expense pops up or if something goes wrong with one of your investments.

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retirementHow to boost your retirement funds

  • Plan ahead

Have you ever taken the time to work out how you will cope financially during your retirement? Even if retirement seems a long way off, it’s never too early to start thinking of the future and how you will put together the funds you need to live the retirement you want. Consider asking a financial planner to help you put together a plan that details your investment options and objectives, insurance considerations, tax issues and an ongoing budget.

  • Set your investment goals

Calculate how much money you think you need to comfortably survive your retirement – the figure may end up being much more than you think. Research by the Association of Superannuation Funds of Australia (ASFA) reveals that in order to live comfortably,  a single retiree needs about $817 per week ($42,604 per year), while a couple needs $1,119 per week (or $58,364 per year). Of course, the amount of money you need to have saved up will vary depending on your personal circumstances. Once you know how much money you need for your nest egg, you’ll be able to choose your investment options accordingly.

  • Government guarantee on deposits

If you’re worried about depositing savings with your bank, you shouldn’t be. The Australian Government Guarantee Scheme ensures that deposits of up to $250,000 with approved financial institutions are guaranteed by the government, offering much-needed peace of mind. So while leaving all your money sitting in the bank often isn’t the best approach to saving for retirement, if you’re one of those people who prefers to hide a stash of cash at home rather than invest it anywhere, maybe it’s time to rethink your savings plan and pay a visit to your bank.

  • Don’t panic

Your investment strategy is in place for a reason, so stick to it. Many inexperienced investors hit the panic button at the first sign of trouble, while they would often be much better off just riding out any obstacles and strapping themselves in for the long term. Trying to predict what the market will do is never a good idea for the casual investor. Instead of second-guessing what share prices will do and trying to beat the market, investing in good-quality blue-chip shares over a long period will likely produce much better results.

  • Don’t worry about past performance

A famous study by The Economist Magazine revealed that if a hypothetical investor had started with $1 at the beginning of the 20th century and then successfully predicted the best investment market every year until the beginning of the 21st century, she would end up with a before-tax investment balance of $9 .6 quintillion. But if that same investor had instead invested in the most successful option of the previous year — a trap that many investors fall into — she would only end up with a paltry $783. This shows the folly of chasing past returns when you should be focusing on the best future investments.

  • Consider boosting your super

One simple strategy to boost your retirement savings is to start topping up your super through salary sacrificing. Putting more money into super also offers an easy way to invest in a diversified range of asset classes — from conservative through to high-risk options — and make your money work harder.

  • Research your investments

Before you choose any investment option, make sure you’re fully aware of the pros and cons involved. For example, how much does your super fund charge in fees each year? How expensive will it be to maintain an investment property? How much brokerage will you need to pay when buying and selling shares? Determining the risks and expenses attached to each investment option will help you make better financial decisions.

  • Diversify your assets

The age-old warning about putting all your eggs in one basket is something every investor could do well to remember. Make sure you are exposed to a wide range of assets to ensure that you’re not over-exposed when one particular asset takes a dive.

  • Don’t leave it too late

When you’re in your 20s or 30s, retirement might be one of the last things you’re thinking about. But the best time to start planning for your retirement is when you’re as young as possible, and you’d be surprised how big a balance you can build when you invest for a couple of decades or more. However, even if you’re into your 50s and you haven’t done any retirement planning, it’s not too late to start setting yourself up for a secure future.

  • Ask a financial professional for help

If you’re trying to work out what you need to do to save enough funds for your retirement, ask your accountant or financial planner for advice. He or she will assess your financial situation and offer advice tailored to suit your needs.

Rates last updated December 4th, 2016
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You’ll need to find the right investment strategy to help build a sufficient savings balance to fund your retirement. Unfortunately, as a consequence of the Global Financial Crisis of 2008 and the fallout that followed, many people view a whole other range of financial services providers and investment options with a certain level of distrust.

But the Depression-era practice of keeping your retirement savings in cash hidden under the mattress or in the freezer is a very bad idea. In the modern world, keeping your retirement savings as cash often refers to keeping all your funds deposited in easy-access transaction or savings accounts, but there are still people out there who would rather keep their physical cash where they can see it.

Shirley Liu

Shirley is finder.com.au's publisher for banking and investments. She is currently studying a Masters in Commerce (Finance) and is the author of hundreds of articles. She is passionate about helping Aussies make an informed decision, save money and find the best deal for their needs.

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ME Online Savings Account

Maximum Variable Rate

3.05%

Standard Variable Rate

1.30
ING DIRECT Savings Maximiser

Maximum Variable Rate

2.75%

Standard Variable Rate

1.60
Bankwest Hero Saver

Maximum Variable Rate

2.65%

Standard Variable Rate

0.01
RaboDirect High Interest Savings Account

Maximum Variable Rate

3.20%

Standard Variable Rate

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