The Risky Retirement Investing Move No One Talks About

The money you're putting aside for retirement isn't coming out of thin air. Rather, you're no doubt working hard to save that money, perhaps by limiting your spending or hustling to fund your IRA or 401(k).

Since building retirement savings takes effort, you may be inclined to take a cautious approach to investing. After all, you don't want to work hard to find the money for your IRA or 401(k), only to lose it during a stock market crash.

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But while it's important to take steps to keep your nest egg secure, playing it too safe could cost you. It's actually a riskier move than you might expect.

A conservative approach could come back to bite you

When people think about investment risk in the context of retirement savings, they usually picture stock market crashes and portfolio losses. But there's another type of risk to know about -- not growing your money enough.

Inflation has made this issue impossible to overlook in recent years. But even during periods of moderate inflation, costs tend to rise over time. If your portfolio isn't invested to keep up, your savings are apt to fall behind.

What this means is that if you park the bulk of your retirement savings in lower-yield assets that are less prone to volatility, like bonds and cash, you risk an eventual shortfall. That could leave you overly reliant on Social Security or force you to make lifestyle changes you don't want to make.

How to find the right balance

If you're anxious about investing your retirement nest egg in stocks, that's understandable. But remember, if you start early enough, you may have decades to ride out market downturns.

This isn't to say you should keep 100% of your savings in stocks. But when retirement is far off, keeping the bulk of your nest egg in the stock market could very much pay off.

To highlight the importance of investing in stocks, let's imagine you fund an IRA or 401(k) over 40 years with $350 a month. With a stock-heavy portfolio, you might enjoy a yearly 8% return and grow your nest egg to about $1.1 million. With a conservative portfolio that's mostly bonds and cash, you may be looking at a 4% return, leaving you with more like $400,000 instead.

If you're very worried about putting money into the stock market, don't take the risk of individual companies. Instead, choose broad market index funds. An S&P 500 fund, for example, gives you exposure to the 500 largest publicly traded companies, allowing you to spread your risk out.

Investing for retirement isn't just about avoiding losses. If you make that the focus, you could end up with a serious shortfall on your hands. Instead of setting yourself up for failure, make sure your money is poised for growth during your wealth-building years, even if that requires you to step outside your comfort zone.

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