Monday Night at Denny's

5

Monday Night at Denny's
 from SmartMoney University

This final disaster story doesn't involve investing in stocks. It has to do with not investing -- letting your savings sit in the bank or in one of those "safe" money-market accounts.

Let's set the scene. You're 35 years old, making a good salary, and putting away about $5,000 a year for retirement. Stocks have never interested you -- they've always sort of given you the creeps -- and you're convinced the bull market is going to come to a screeching halt, anyway. Better to put your money in a conservative investment.

Flash forward 25 years and suddenly you're on retirement's doorstep. The money you've socked away at 6% a year totals almost $300,000. Will it last another 20 years or so? Let's see...after 25 years of 3% inflation, $300,000 really buys only $192,000 worth of greens fees and tickets to see the grandchildren. And when you take out what you owe in taxes, your total dwindles down to about $138,000.

You'd better hope your kids are generous.

The fact is, unless your idea of happiness is the Monday night seniors' buffet at Denny's, you'd better get aggressive when you're young. That's when you have enough time to absorb the periodic short-term losses that inevitably accompany stock investing. At 11% annually -- the historical return for the S&P 500 -- your $5,000 a year would have preserved your $300,000, given the same assumptions. And even that wouldn't be enough. You should be saving more than that each year.

Of course, proper asset allocation would have dialed your exposure to stocks back as you got closer to your chosen retirement age. But even so, you'd still be far ahead of where you were if you'd stuck with the money-markets. The stock market may be risky, but avoiding it altogether may be riskier still.