Building long-term wealth is a responsibility that all people share in order to properly prepare for retirement. While people can spend decades saving a substantial amount of money in their retirement and other personal savings accounts, those that do not invest and simply let it sit as cash will likely not have enough money to retire or meet their other investment goals. There are several reasons why you need to invest your savings.
The primary reason why you need to invest is that it will provide you with a much greater return on investment than you would receive by putting your money in cash. Historically, the stock market has increased by an average of 7 percent per year. While the investment return can fluctuate greatly from one year to the next, those that have committed to the stock market have found that their net worth will increase over time. At the same time, checking accounts, CDs, and money market accounts typically provide interest rates that are less than one percent and well less than inflation. This means that money that is left in a bank CD or money market account will actually decline in net value on an annual basis. As a result, your net worth and ability to support yourself in retirement will always decline if you do not invest.
The second reason why you need to invest is to take advantage of compound interest. Those that choose to start investing early in their careers will be able to take advantage of 30-40 years of compounding interest. For example, someone that invests $10,000 at 7 percent interest at the age of 22 will have $150,000 by the time they are 62. If someone waits til the age 42 to start investing, they will have only $39,000. The same person would need to invest close to $40,000 to reach the $150,000 market by age 62.
Another reason why you need to invest is that it will help you build income in a tax-beneficial manner. When you invest and hold for a long period of time, there are a number of tax advantages. IRA and 401k accounts have a variety of tax benefits that range based on the investment option. 401k accounts allow your money to be invested tax deferred and grow tax-free. You will only be taxed on 401k income when it is withdrawn. IRA funds typically are invested post-tax, but are then able to grow tax-free without any future taxation. Furthermore, if you invest in stocks or bonds in a typical investment account, you will receive a lower taxation rate as long as you hold the investments for more than 12 months.