America is Backwards: Savings vs Investments

With diminishing savings in general, and sporadic market losses and gains that for the last 10 years have not favored the investor, it seems America is backwards on a roller coaster, and looking up on the way down, when it comes to investing.

The main problem, however, is not the unpredictable market, but the overall philosophy being taught to us by proclaimed experts about how to securely plan for retirement. The outcomes are sensible, however the road there is failing us.

When it comes to retirement, we are told to put our money in a 401k, or another type of savings vehicle. The problem is not with the vehicle itself, as it is with labeling these types of accounts as “savings.”

What then is the difference between “savings” and “investments?”

An investment is any type of vehicle that provides the opportunity for gains, while placing risk on the side of the investor. Whenever there is uncertainty of gains, and risk of loss, this then would be, in definition, an investment vehicle.

A savings vehicle, on the other hand, is any vehicle that provides an opportunity for growth, while at the same time guaranteeing a preservation of the original principle invested.

Where then does a 401(k) fit in? With its opportunity for losses, and many have lost a very significant portion, and it’s ability to produce gains, a 401k then is not a savings vehicle, it is an investment.

What is the problem then? When the 401k came into play it replaced, for the majority, pension plans for the average American. The responsibility for retirement was then shifted from the employer to the employee.

However, as we discussed on the Barry Dyke podcast, most top level employees–CEO’s, CFO’s, etc.–are still being offered employer provided pension plans.

So let’s look at the pension plan. Pensions are generally annuity based plans, and for the most part (though not always) these plans are not directly tied to the markets, and provide stability for the principle amount invested.

The main problem for Americans in general is that, as the 401(k) was a replacement for the pension plan, it was automatically considered a savings type vehicle. However, with the full amount being placed at risk, the 401k is indeed an investment, and not a savings plan.

We see many of our older generation staying in the workplace, and many if not a majority of these have had major setbacks in their retirement plans due to the poor market performance throughout the last decade.

What then is the solution? Financial intelligence and proper decision making. We must upgrade our financial IQ. Understanding in actuality where we are placing our money is a huge step in taking control of your own financial future. Does this mean there is no place for the 401k? Not at all, however, automatically assuming that the 401k is the best savings tool out there for you is like diving off a bridge and hoping the water is deep enough.

We must have more security in our financial future, and the very start to this is placing our savings dollars where they can be risk free and secure, and wisely choosing which dollars we can put into investment for risk and potential growth.

Josh Thompson

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