Debunking 13 Retirement Myths

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).

Myth #8: Your house can finance retirement. I’ve said this before — your house is not a retirement plan. Real estate investments are another matter; unlike other investments, the house you live in provides your shelter and is harder to cash in. You have to live somewhere. In order to start seeing the value of your house in cash, you have to downsize. Another option, a reverse mortgage in which you slowly sell your equity back to a bank, will leave you with no asset to leave to your heirs.

Myth #9: You’re too old to start saving. This is pretty straightforward. It’s never too late to start putting away money for retirement. Of course, it will be much more difficult to amass significant savings starting within earshot of the end of your career, and some sacrifices will be necessary. That might mean downsizing your house and socking away the difference or cutting back expenses.

Myth #10: Short-term market swings don’t matter. This is the mantra of the long-term investor. The daily or monthly ups and downs are irrelevant because over the long term, the stock market provides returns higher than inflation. The truth is that as you grow closer to when you’ll need to access the cash value of your portfolio, those short-term swings can be devastating. That is why your asset allocation, the mix of investments, is important. As you approach retirement, your portfolio should include a smaller portion of stocks and a larger portion of low-risk investments like bonds.

Myth #11: Top priority is the kids’ college. If you can’t fund your own future as well as your children’s education, you have to make some choices. You could always borrow money for your kid’s education while you can’t do so for your own retirement. Now, you could change some of your expectations, such as an adequate rather than dream-fulfilling retirement home or state schools rather than Ivy League schools for your kids, but when it comes down to it, your own needs come first. At least that’s what the financial community generally believes.

Now you can hope that if you help your children pay for an excellent education, they will get excellent jobs with excellent paychecks, and will use their funds to support their parents in retirement and old age. But no matter how much you spend on education, that’s never a sure thing.

Myth #12: Decent savings plan = early retirement. Early retirement itself is almost a myth. You’re going to have to be very aggressive with savings and investing if you intend on ending up with a portfolio that’s going to allow you to live off its own income for 30 to 40 years or more. Are you saving one-third of your pay after taxes? If not, you’re not on the path to early retirement.

Myth #13: You’re bound to mess up your 401(k). 401(k)s can be easy, but with companies offering a multitude of options, and in some cases making it difficult to determine the true cost of funds, it has become much easier to make a mess. Companies have countered this by offering financial guidance for their employees enrolled in the retirement investment plans. Companies often automatically enroll new employees in 401(k) with default options, which are usually good enough if never touched, only increased, to keep a solid investment plan in gear.

Myths exist because they resonate with enough human minds to be able to convince people of their truthiness without much support.