Despite the sluggish recovery, Americans are starting to feel a little better about their prospects. But that may not be good news for retirement savings. While the recession shocked us into boosting our near-zero savings levels, we’re already being less frugal.
After climbing to 7.2 percent in the second quarter of 2009, the U.S. savings rate dipped to 5.1 percent in the first quarter of this year, the lowest level since the financial meltdown, according to the Bureau of Economic Analysis. Meanwhile, the average 401(k) balance hit $74,900, according to Fidelity Investments. That’s only enough to cover about three years of retirement expenses.
Are you ready for retirement? Investment advisers like to trot out handy rules for savings plan. But some of this conventional wisdom makes it easy to slide off the thrifty path. Here are seven myths about retirement that can trip you up.
Myth No. 1: Max out your 401(k) contribution and you’re set.
You’re responsible, and contribute the maximum amount allowed under tax law: $16,500 for a traditional 401 (k) plan in 2011. That should do it, right? Wrong. The right amount you need depends on your age and income, risk tolerance and expected retirement lifestyle. "Your 401(k) is not going to cover it all," predicted Carlo Panaccione, a certified financial planner and president of the Navigation Group in Redwood Shores, Calif.
Myth No. 2: There’s a retirement magic number.
Sorry, magic isn’t real. It's not enough to do a one-time calculation of the amount of money you’ll need. The total can change depending on the state of the market in the year you retire to the size of your medical bills. The amount you think you’ll need when you’re 35 will likely be very different than the figure you’re aiming for when you reach 55. Don't rely on the false comfort of hitting your "number" and neglect to revisit the plan on at least an annual basis.
Myth No. 3: Starbucks is killing you.
We’re not recommending a daily Starbucks run, but even if you saved $3 on each of the 20 workdays each month for 20 years, then earned a whopping 10 percent annual return, you'd only end up with $45,000. You might feel virtuous about sacrificing your daily latte, but you’ll probably need to think bigger: Perhaps you need to move to a smaller house and cut your mortgage payment by $1,000 a month.
Myth No. 4: You should spend lots of time on CNBC.
You don’t have to be a market whiz. The two most important factors in the growth of your retirement account are (1) how much you save and (2) your asset allocation strategy. It's a lot more important to start saving than to pick the perfect international stock fund. Because there are so many possible strategies and so much free advice, it’s easy to feel frozen. But start stashing money away immediately — even if it’s only in a money market fund — and revisit your investment choices later.
Myth No. 5: The biggest risk is losing money in the market.
Over time, it's almost impossible to avoid losing money in the market, even for the best stock picker. But the greater risk is outliving your savings. Unless you expect to die in the next decade, the stock market should be part of your strategy. Investors who moved from equities to bonds in 2008 lowered their returns by an average of 2 ½ percent per year for every 10 percent of the portfolio they shifted, said Richard S. Kahler, a certified financial planner in Rapid City, S.D.
Myth No. 6: I will spend less money once I'm retired.
Many retirees find they end up spending more money in the first years after they leave their jobs, because they finally have the time to start raising orchids or take that cruise to Alaska. And as time goes one, health care begins to eat up a much bigger chunk of your monthly budget. Many financial planners advise saving as if you were going to spend at about the same rate in retirement as you do now.
Myth No. 7: My assets will sustain me.
The only assets that help you in retirement are those that produce income. Your vacation home at the shore is only an investment if you plan to sell it or rent it out. Sort out your assets according to whether they're “working assets” that create income or "play assets” that you enjoy owning. The latter category should be classified as an expense. (Hint: Your sports car collection is not a working asset.)