Cash is Not King
Unfortunately, cash isn’t necessarily the best solution, either. Firstly, cash doesn’t receive much of a return. With such low interest rates, you are unlikely to make more than 0.5 percent on any cash balance. The more of your savings you keep in cash, the less there is to make the high returns that the stock market has historically provided. But generating poor returns isn’t the main reason that cash is a bad thing. The real problem is inflation. Inflation, the wealth killer Inflation is the tendency for money to be worth less in the future than it is today.
If $1 buys you a loaf of bread now, there’s no guarantee that it will still be enough to do so in a year’s time. This is why the price of most goods keeps going up, year after year. Most years, inflation is around 2 or 3 percent. That means you savings have to be generating 2 or 3 percent returns just to be worth exactly the same amount! If they are not, then the gradual effect of inflation is to take a bigger and bigger bite out of your savings, eroding their value over time. Even if inflation stays at 2 percent – the target set by the Federal Reserve – $10,000 of savings would only be worth the equivalent of $8,200 after 10 years.
When inflation remains on target at 2 percent, this is bad enough. Savers see the value of their money gradually decreasing, year by year. Since your retirement may last 20 or 30 years, this is why it is a bad idea to rely on fixed payouts from your savings plan. What seems like enough to live on now could be worth less than half as much further down the line. When inflation rises above this level, the effects on your cash savings can be dire.