Gone are the days of the simple savings account, however. Today's adults need to use their current incomes wisely and save as much as possible, but saving alone will not ensure a comfortable retirement. Only the stock market can provide the growth rates tomorrow's retirees will need over a period of decades.
Of course no savings is "passive." Individuals must make the commitment to save. Here, passive savings refers to those accounts to which individuals make deposits and have the funds easily accessible, but they have to take no active role in tracking their funds, moving them or otherwise bothering with them. Passbook savings, CDs and money market accounts qualify under this definition, as well as many IRAs and 401(k) accounts.
In all these arrangements, account managers have direct control over the funds in various accounts. The individual may be able to make some choices, such as what percentage of his 401(k) he wants the administrator to invest in the market, but for the most part, the individual has very little control aside from choosing to move his funds to another vehicle or another investment. .
Most of these products provide the individual with a low rate of return. CDs rarely pay more than 6 percent in today's market, even if they are purchased for a relatively long term. And only a mattress is a worse place for funds increase than is a standard bank savings account. Tomorrow's retirees have no time to wait for a $100 savings account balance to grow to $104 when the same year waiting period can result in that same $100 growing to $150 or more.
These low-return savings routes are completely safe in that the individual cannot lose any principal when staying within the limits of the bank's insurance plan. Individuals committed to these routes often say the market is too risky, that they will not put their money into it. They fail to realize, of course, that their funds are not merely resting inside the bank waiting for withdrawal, that the bank itself is investing those funds for its own benefit.