Wealth management
Why leaving your IRA in cash could cost you in retirement
Opening an IRA is an important step in your retirement journey—but allocating those funds is what really transforms your contributions into meaningful retirement growth.
Summary
- Unlike 401(k)s and 403(b)s, IRA contributions aren't automatically invested—they often sit in low-yield cash accounts earning minimal returns.
- Uninvested cash significantly underperforms diversified investments, potentially costing thousands in lost retirement growth as it barely outpaces inflation.
- Getting your money working is simpler than you think—TIAA's investment options and free advice can help you take the next step toward meaningful retirement security.
The IRA trap
Imagine planting a garden but never watering the seeds. For most people, this seems like an obvious, and fixable, problem. Of course, the seeds can’t grow without water. Yet many people fall into a similar trap when
But without the crucial next step of allocating these funds to investments, their retirement garden won’t be fruitful. These funds typically end up in cash. And while cash may seem safe, it’s silently losing ground to inflation—potentially costing you thousands in missed growth, which could make the difference between a retirement account that flourishes and one that withers away.
What staying in cash means
When you open and fund an IRA, your money isn’t automatically invested, unlike a 401(k) or 403(b). Instead, your contributions typically go into a default cash account that holds the deposit until you’re ready to allocate. In a newly opened IRA, funds are typically allocated to low-yielding Money Market funds. While this provides flexibility as you decide what to invest in, keeping retirement funds in cash over the long term can significantly undermine your financial goals. According to TIAA Chief Portfolio Strategist John Canally, “From 1926 to today, cash has barely outpaced inflation with average returns of about 3.5%, while inflation averaged 3%. That’s not going to get you to your retirement goals.”
So why do people stay in cash? Reasons often vary depending on investor experience and awareness. “Clients get hooked on the bright shiny object of cash because it’s safe, and then their portfolios suffer,” says Canally. Others feel overwhelmed by the potential investment choices available to them. But for many new IRA owners, the issue isn’t an active choice to stay in cash—rather a lack of awareness about what happens after funding an account.
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Cash isn’t always king
Yes, it’s important for investors to have cash on hand to meet spending needs and provide a safety net for emergencies. And, yes, an 85-year-old retiree should have a bigger cash allocation than a 25-year-old opening their first retirement account. But leaving significant portions of your IRA in cash over time can be detrimental to your long-term financial goals, potentially eroding your purchasing power due to inflation.
Consider this example: $10,000 placed in cash during January 2020 would be worth only about $9,000 today after accounting for inflation. However, that same $10,000 invested in a diversified portfolio would have grown to approximately $16,500, despite market fluctuations during the pandemic.
The potential costs of long-term cash
Long-term allocation to cash is likely to underperform market returns
Source: Bloomberg, TIAA Wealth Chief Investment Office. This is a hypothetical example used for illustrative purposes only and is not intended to predict or project investment results show less.
Timing the Market
And for those trying to time the market by staying in cash, the cost of missed opportunity becomes even greater. Remaining on the sidelines during the market’s best days—whether intentional or not—can really add up, and not in a good way. “Over the past 20 years of trading, which is close to 5,000 trading days, if you would have just missed the 10 best days, your average annual returns from the S&P 500 would have dropped from around 10% down to 6%. That’s just enormous,” says Canally. “If you miss the best 20, you’d go to down to around 3%.”
Missed opportunities in the market
The difference between staying invested or missing the best days of U.S. stock market performance
Source: Average annual return of the S&P 500 Index for all trading days during the past 20-years vs. average annual returns for the index if the best performing days were missed. This is a hypothetical example used for illustrative purposes only and is not intended to predict or project investment results show less.
Get your money working today
The good news is that allocating your IRA funds is an easy and straightforward process. Proper allocation starts with understanding your retirement goals, timeline, and comfort with risk. For most investors, a diversified investment strategy across different asset classes can help manage market fluctuations while pursuing long-term growth.
TIAA IRAs offer nearly 100 different investment options, ranging from “all in one” target date funds to professionally managed mutual funds. What makes TIAA IRAs distinctive is the ability to purchase annuities, which can provide
If all these investment options feel overwhelming, TIAA provides personalized advice at no additional cost to help guide your decisions. Our online, self-service advice tools allow you to independently obtain guidance tailored to your specific needs. These tools, powered by Morningstar expertise, help you determine savings goals, retirement timing, and investment strategies. You can then seamlessly implement these recommendations with just a few clicks.
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This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances, which should be the basis of any investment decision.
Diversification is a technique to help reduce risk. It is not guaranteed to protect against loss.
Investment products may be subject to market and other risk factors. See the applicable product literature or visit
Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser. TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, distributes securities products.