Saving for retirement is no picnic. You need to be disciplined and focused on the future if you hope to save enough money to see you through your golden years. You also need to be able to separate the truths about retirement saving from the lies.
Evidence suggests Americans are failing on all of the above counts. The average American family has just $5,000 set aside for retirement, and 43% of working-age Americans don’t have any retirement savings, according to an analysis by the Economic Policy Institute. Seventy percent of families have less than $50,000 in their 401(k). And lest you think younger workers with little in savings are skewing the numbers, consider this: Among households with members approaching retirement, the median savings balance is just $17,000. That’s hardly enough to buy a used car, let alone fund decades-long retirement.
Why aren’t Americans saving more? Many just don’t have the money. But a confusing retirement landscape doesn’t help. People aren’t clear how much they need to save, what they should do with the money they set aside, and how long they can expect to live once they stop working. Rather than carefully planning for the future, they make decisions almost at random, sometimes relying on myths, misinformation, and outright lies. Swallowing those retirement whoppers hook, line, and sinker can cause people to make critical errors today that jeopardize their financial security down the road.
From myths about the market to Social Security hogwash, here are nine of the biggest lies you’ll hear about saving for retirement.
1. You have plenty of time
Retirement may be decades away, but that doesn’t mean you can afford to put off saving. When you start saving early for retirement, you’ll have to save less money overall, since your money has more time to grow. Say you want to have a $1 million nest egg by age 65 (which may not be enough, as we’ll explain later). If you start saving at 25 and you get average returns of 7% every year, you’d need to save $381 per month, GoBankingRates calculated. If you put off saving until age 35, you’d need to set aside $820 every month to become a millionaire by 65. The chart below shows how much you’d need to invest every month to get to $1 million depending on when you start saving and the rate of return.
2. Investing your retirement savings is too risky
Millennials are scared of the stock market, and with good reason. The financial crisis of the late 2000s was frightening. Young people watched as their parent’s retirement accounts tanked in value and their home equity suddenly vanished. As a result, some younger savers are risk averse. They’re hesitant to invest their savings, preferring to squirrel away cash, which could hurt their attempts to accumulate enough money to retire. Only 33% of people between the ages of 18 and 35 are investing in the stock market, compared to half of Gen Xers and baby boomers, a Bankrate survey found. Many don’t invest because they don’t have the money, but 17% are staying out of the market because they think it’s too risky. Yet if they don’t invest more aggressively, they’ll have to save a lot more to enjoy a comfortable retirement.
3. Social Security will be enough
Social Security is a key component of the retirement savings puzzle for most Americans. But it’s not wise to count on it as your sole source of income in your old age. The average retiree receives $1,363 every month from Social Security. That’s enough money to keep seniors out of poverty, but it doesn’t exactly afford a luxurious retirement lifestyle. To meet expenses beyond basics like shelter, food, and clothing, you’re going to need additional funds.
4. You can’t count on Social Security
The flip side to the myth that Social Security will provide enough to live on in retirement is the idea that the program is on the verge of going belly up. Doomsayers claim Social Security is about to run out of money and younger workers will never get benefits. While it’s true that Social Security faces some big financial challenges, the government would still be able to pay out 77% of projected benefits even once the program’s reserves run dry. Younger workers may not get quite as much as they were promised from Social Security, but they will probably get something. Older workers are unlikely to see their benefits slashed.
5. You’ll need $1 million to retire
Retiring as a millionaire sounds great, but the truth is that $1 million doesn’t go as far as it used to. And by the time you eventually retire, it will stretch even less. Yet millions of Americans are using $1 million as their retirement savings goal for no better reason than it’s a nice, round, seven-figure number. The problem with the $1 million number is that it ignores your actual financial reality.
Rather than focusing on an arbitrary figure, you need to estimate how much you’ll actually spend in retirement. There are a lot of ways to do such a calculation, but one of easiest is the rule of 25. The math is simple: Just multiply your current spending by 25 to get an idea of the nest egg you’ll need in retirement. If you can live on $40,000 a year or less, $1 million for retirement may be enough. If you spend $70,000 a year, $1.75 million may be a better target. The calculation isn’t foolproof – it doesn’t include money you’d get from Social Security, for one – but it’s a better estimate than a number you picked at random.
6. You can rely on a windfall
Whether it’s because they saw their own parents receive an inheritance or they’re just being incredibly optimistic, a significant minority of young people are counting on a windfall to cover their retirement expenses. Fifteen percent of people say winning the lottery will fund their retirement, while another 11% are counting on an inheritance, the Insured Retirement Institute found. Unfortunately for their offspring, baby boomer parents aren’t planning on passing their wealth on to their kids. Many well-off boomers expect to either spend all they’ve saved or leave their assets to charity, CNBC reported. And even a promised inheritance can evaporate because of family conflict or a financial crisis. Rather than counting your chickens before they’re hatched, you should plan for the future as if you won’t receive a windfall.
7. You can work for as long as you want
Many Americans know they don’t have enough money to retire. Often, their solution is to put off retirement for as long as they can, so they can save more money and avoid drawing down their savings. Thirty-eight percent of pre-retirees surveyed by the Society of Actuaries said they planned to stop working at 65, while 19% planned to work until 68 and 14% said they had no plans to quit working.
In reality, people often end up retiring sooner than they expected. The average retiree left their job at age 60, the same survey found. Nearly one quarter were out of the workforce by age 55. Many of those early retirees didn’t leave their jobs by choice. Instead, health problems, layoffs, and family issues pushed them out of the workforce sooner than expected.
8. You won’t live that long in retirement
The longer you live after you retire, the more money you’re going to need. Yet more than half of pre-retirees are underestimating their life expectancy, including 20% whose estimates of how long they are likely to live are off by more than a decade, the Society of Actuaries found. Today’s savers need to plan for a longer lifespan, since many could live into their 80s or 90s – two or three decades after they stop working, rather than the 10 or 15 years some might anticipate.
“Just planning for a certain period of time and not having a contingency plan for living longer is a big mistake,” Cindy Levering, a retired consulting actuary, told Forbes. “You have to recognize there is a good chance you’ll live past 80.”
9. You can’t afford to save
Sometimes, the most damaging lies are the ones we tell ourselves. While it’s true that saving for retirement can be a real challenge for some people, many non-savers do have money they could set aside for the future, if they only knew where to look. Once you cut back on frivolous spending, you may find you can afford to put a little more in your 401(k). The potential savings from small changes can be huge. A 20-something who skips a once-a-week $20 Uber ride for an entire year and invests that money instead could have an extra $19,365 at retirement, Money calculated.