Money Magazine is on the scene again, spreading the truth about retirement, contrary to some popular beliefs. Within, these is some good news alongside bad news. Here are the highlights.
Myth #1: You need a big income to have a big nest egg. Some creativity can go a long way. By finding ways to save and keep saving, you can ensure an adequate retirement. Getting a raise? Why not put that new, extra money into a retirement account rather than increase your standard of living by spending more?
Myth #2: You can’t get rich with a 401(k). This is a myth perpetuated by a certain financial guru as well as others who vilify standard investing concepts like asset allocation diversification and investing vehicles such as mutual funds. The truth is that investing with a 401(k) account is one of the best ways to increase wealth over the long term. Yes, it’s a slow process, but smart investing is virtually guaranteed over the long term. Start a business that catches on and you’ll get rich a lot faster. Unfortunately, it much, much more likely that your new business will not make you rich… ever.
Myth #3: Everyone has debt. I’ve heard this justification many times as people I know spend beyond their means. “Debt is a fact of life.” It doesn’t have to be. Granted, it’s very difficult to purchase major assets, like a home and a quality car, without a mortgage or loan. If you’re going to have debt, it should decrease over time — and not too slowly. Credit card debt should be right out… and the idea that everyone has it is a myth perpetuated by the media. I’ve found that in conversations about debt, those who are debt free often do not speak up. Perhaps they are afraid that their attitude will come across as smug. These discussions can be difficult, and it’s easier for the debt free not to say anything than to be misinterpreted.
Myth #4: A million dollars will cover you. Thanks to inflation, a million dollars just can’t provide all that it has in the past. Don’t get me wrong, I wouldn’t turn down such a payoff, but a million dollars now might provide $40,000 a year for the rest of my life. I’d have to cut back my current expenses, which aren’t very lavish except for a few aspects I’ve been enjoying recently, in order to live on $40,000. If my $1 million doesn’t arrive until I retire, 30 years from now, that sum will have the purchasing power of approximately today’s $600,000. That would be the equivalent of living on a yearly $24,000 in today’s dollars. If you don’t see that happening, your nest egg goal better be higher than $1 million.
Myth #5: Boomers will crash the market. I’ve heard many times that the sheer numbers of the baby boomer generation will pull their money from the markets at roughly the same time, causing a market crash. Money Magazine believes this scenario is highly unlikely. Ownership in stocks is among the highest income brackets, and these people will not be strapped for cash so much that they withdraw money from the market. Expect stocks to perform fine as baby boomers retire and continue living.
Myth #6: Without a pension, you’re doomed. Pensions hardly matter to my generation. Pensions reward employees who have been loyal to their company for many years, and these is a dying trend. It may be an interesting discussion about whether the disappearing pension is the cause or one of the causes of the decrease in time spent with one company. Annuities can take the place of pensions for those who want their retirement funds disbursed in regular payments.
Myth #7: Social Security won’t be there. This is one of those hot-button political issues. Politicians, whether they like it or not, have to speak to the future of social security. Some projections show that the program will be underfunded in the upcoming years. Social Security isn’t really a retirement savings program, it’s a wealth redistribution system. Money is transferred from those who are gainfully employed to those who are not for one reason or another. Should you be alarmed? I think the bottom line is that Social Security benefits will continue to exist in some fashion, but it’s a good idea to do what you can do to take care of yourself first.
There are varying opinions about Social Security, and for some reason it’s one of the more emotional issues. Some might disagree that it is a system for wealth redistribution, and some would go so far to call it a Ponzi scheme, in which recipients (retirees) are paid not from investment income but from the direct investments of new investors (current workers).
I’ll look at the remaining retirement myths tomorrow.
13 Retirement Myths [Money Magazine]
Image credit: Peter Kaminski
Published or updated October 15, 2007.
{ 5 comments… read them below or add one }
Great article that raises some interesting points. I started saving in my early 20’s, and think everyone should be saving from an early age, but the cost of living is so high nowadays that a lot of people are going to be in trouble come retirement age and I agree $1m will not be enough in the future.
I think that as far as Social Security type programmes are concerned, all we need to do is blackmail younger generation into paying in when its our turn to get money out.
“Myth #4: …a million dollars now might provide $40,000 a year for the rest of my life.”
Actually, if you are a male and were to retire at age 65 today, your $1 million could be used to purchase an immediate annuity (single life) for approx. $6,720 per month or approximately $80,640 per year (grabbed from immediateannuity.com). If you wish to keep the principal intact for your heirs, I agree with your $40k estimate, but that’s a choice, not a requirement.
Re Myth #4, at least you don’t pay Social Security/FICA tax on investment income, so getting $40k/year is like getting $43k/year at your job or $47k/year if you’re self-employed.
Also, if you can structure your income as long-term capital gains rather than interest/dividends, then your income tax would be reduced as well.
My husband and I have no debt and we own our home. But, you are right I wouldn’t talk about being debt free.