"Save for retirement." "Invest for retirement." You've probably heard these phrases many times and may have even used them yourself. But what do they mean? When you put money in a retirement plan or in a bank account that earns interest, are you saving or investing? Recognizing the difference could help you plan for a financially comfortable future.
When It's Saving
Think of saving as preserving the assets you already have. Basically, when you put money in a savings account, certificate of deposit (CD), or similar low-risk account, you expect to maintain your principal without having it grow dramatically. The interest rate on your savings is predictable -- and, in some cases, fixed -- so you know how much you'll earn on the money you've saved.
But what you won't know is how much of a bite taxes and inflation will take out of your savings. So, even though you'll probably end up with more cash in your account than the amount you deposited, your money's buying power may be substantially reduced by inflation over time.
When It's Investing
Investing generally means putting your money into securities that contain more risk. When you buy stocks or bonds or contribute to a retirement account such as a 401(k) or an IRA that invests in stocks and bonds, you can't be sure you won't lose some, or even all, of your principal. (2) The prices of securities can fluctuate, especially in the short term, so you'll have to be prepared for the fact that the value of your investments may decline. But, in return, investments that carry more risk also offer the potential for higher returns and earnings that may outpace inflation over the long term.
1 CDs offered by banks and credit unions may be insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, up to specified limits. For more information, see the SEC's web page "Certificates of Deposit."
2 Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values may decline as interest rates rise and are subject to availability and change in price.