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47% of Americans Aren't Taking Advantage of This Way to Exponentially Grow Their Savings

Katie Brockman, The Motley Fool

Retirement is becoming more expensive than ever, with the average worker estimating they'll need around $1.7 million saved for retirement, according to a survey from Charles Schwab.

Although many workers know they need to be saving well over $1 million by the time they retire, the median amount baby boomers have stashed in their retirement accounts is just $152,000, according to a survey from the Transamerica Center for Retirement Studies.

Saving for retirement takes decades of hard work, and if you wait too long to get started or don't save much on a regular basis, it will be difficult to reach your goal by the time you retire. But besides simply not saving enough, there's another factor that may be putting your retirement savings at risk: being too safe with your savings.

Folded dollar bill pointing upward

Image source: Getty Images

When playing it safe hurts your savings

You've worked hard to save what you can for the future, so it's reasonable to think the best place to store your savings is in a "safe" account, such as a checking or savings account. However, keeping your retirement savings in these accounts can actually do more harm than good.

Even high-yield savings accounts only have interest rates of around 2%, and if inflation hovers around 2% to 3% per year, your money is likely to lose value the longer it sits in that account. Checking accounts have even lower interest rates -- usually just a fraction of a percent. That's not to say savings and checking accounts don't have their merit, but they aren't the best options for long-term saving.

While slightly riskier, investing in the stock market is the best way to earn high returns so you can save enough for retirement. However, 47% of workers don't invest their money, choosing instead to store it in "safer" places like checking and savings accounts, according to a survey from GOBankingRates.

If you're only saving in these low-risk, low-reward types of accounts, your savings don't stand a chance at compounding enough to retire comfortably -- unless you're able to save thousands of dollars per month.

Consider this example: Your goal is to save $1 million by age 70 and you start saving at age 22. If you earn a 2% annual return on your investments, you'd need to save more than $1,000 every month for 48 years to reach that goal. But if you were earning an 8% return by investing in the stock market, you'd only need to save around $175 per month, holding all other factors steady.

How to avoid risk while earning rewards

Of course, earning higher returns on your investments sounds ideal, but there's a reason why so many people avoid the stock market: It can be risky. Especially as many workers continue recovering from the Great Recession, it can be tempting to keep your savings somewhere you know they'll be safe from market downturns, even if you realize you're not earning as much as you could be in growth. That said, the stock market isn't as risky as it might seem, especially if you invest in the right places.

When many people think of investing, they picture stock brokers frantically running around Wall Street. But in reality, you can invest simply by contributing part of your paycheck to a workplace 401(k). These types of retirement accounts, such as 401(k)s and IRAs, allow you to invest in index funds and mutual funds, which are collections of dozens or even hundreds of different stocks and bonds. This diversification makes these options less risky than investing in individual stocks because if one or a few of the companies within the fund don't perform well, your entire portfolio won't take a nosedive.

Although index funds and mutual funds are among the safest forms of investing in the stock market, they are still susceptible to market downfalls. But over time, these funds tend to see positive returns. So while your investments may take a dip every so often, if you let your money grow untouched over several decades, you'll see your savings skyrocket.

We all want what's best for our finances, but sometimes even well-intentioned financial decisions end up doing more harm than good. If you're keeping most of your savings in "safe" investments like checking accounts and savings accounts, you likely won't be able to save enough to retire with as much as you need. But by investing your cash in the right funds in the right accounts, you can earn significantly higher returns while still limiting your risk.


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This article was originally published on Fool.com