A woman with short black hair smiles into the distance.

The case for moving cash out of retirement accounts

9 minute read
November 17, 2023
Planning for retirement
Cash investments

Having cash investments—like money market funds, savings accounts, and CDs (certificates of deposit)—in your retirement account may not be as beneficial as you might think. It's a good idea to have them available for short-term goals—like emergency savings or an upcoming vacation—because they're low risk and highly liquid. But for long-term goals—like retirement—they lack the earning potential of other asset classes, such as stocks and bonds.

Moving out of cash positions today may help you build more retirement savings for tomorrow. Here's why.

Increase earning potential with a diversified portfolio

When inflation goes up, things become more expensive, and cash loses its purchasing power. Cash investments may result in lower returns—so you run the risk of not meeting your goals. Instead, investing in a portfolio of different asset classes—like stocks and bonds—can help you keep up with inflation by earning more on your savings.

While investing in stocks and bonds can increase your risk, they have a higher potential for returns when compared with cash investments. Figure 1 shows the potential returns from investing in different asset classes. While investing in the stock market is riskier than investing in money market funds, it can lead to higher returns. So while you may think you're playing it safe by being in cash positions, you may be missing out on returns over the long term.

Figure 1: See how 10-year average returns can vary across different investment markets

Source: Vanguard. 

Notes: Money market benchmark, represented by US Government Money Market Funds Average, total bond market benchmark, represented by the Total Bond Pool Benchmark; total stock market benchmark, represented by the Spliced Total Stock Market Index (the MSCI US Broad Market Index from 2012–2013 and the CRSP US Total Stock Market Index from 2013–2022). All data are for the 10-year period ended December 31, 2022. Results will vary for other time periods. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Because it's difficult to predict which investments will perform well, diversifying across asset classes in both domestic and international markets can help shield you from unnecessarily large losses when inevitable market downturns occur. If one company or sub-asset class is underperforming, you'll have other investments to help balance out the ups and downs. Remember, the higher the risk, the (potentially) higher the reward. Taking measured risks you're comfortable with can help you see returns in your portfolio. Figure 2 shows how varying stock and bond allocations may result in different returns.

Figure 2: See how returns can vary across different stock and bond allocations

Source: Vanguard. 

Notes: Data are as of December 31, 2022. Returns are depicted for period starting in 1926 and ending on December 31, 2022. Data for U.S. stocks are from Standard & Poor's 90 from 1926–1957, S&P 500 Index from 1957–1974, Wilshire 5000 Index from 1975–2005, MSCI US Broad Market Index from 2005–2013, and CRSP US Total Market Index from 2013–2022. Data for U.S. bonds are from Standard & Poor's High Grade Corporate Index from 1926–1968, Citigroup High Grade Index from 1969–1972, Lehman Brothers U.S. Long Credit AA Index from 1973–1975, Bloomberg US Aggregate Bond Index from 1976 –2009, and Bloomberg US Aggregate Float Adjusted Bond Index thereafter. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Investing today can go a long way

The more time you have until retirement, the more you may benefit from the power of compounding. Your future returns build on previous ones, and these "earnings on earnings" can grow to be as large as or even larger than your initial investments. Figure 3 demonstrates how investment returns contribute an increasing percentage toward your goals over time when compared with the amount invested.

Figure 3: Leave your earnings invested and watch compounding go to work

Notes: This hypothetical illustration assumes a $10,000 investment and an annual 6% return. The illustration doesn't represent any particular investment, nor does it account for inflation, and the rate is not guaranteed.

Retirement may seem far away right now, but before you know it, you'll be ready to move into that next phase of your life. Taking steps now to move out of cash and diversify your portfolio will help set you up for financial success so you can live the life you deserve.

Consider investing your cash today.

Most Viewed

Ready to invest? See how to open an account
Start with this step-by-step guide to opening a personal investment account, such as a general investing brokerage account or an IRA.
Backdoor Roth IRA What it is and how to set it up
If you are a high-income earner, a Backdoor Roth IRA may be a good retirement investment option for you. Learn what it is and how to set up this type of retirement plan.
Who owns Vanguard?
Who owns Vanguard? Learn why we're proud to be the only investor-owned investment management company and how we focus on putting investor needs first.
Are bonds a good investment right now?
Learn how high-quality bonds can play a valuable role in your portfolio in a high-yield environment.
Top 6 tips: Your year-end financial checklist
Discover our new international fund

All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future results. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.