by Penelope Wang
1. Myth: You need a big income to have a big nest egg
With planning, discipline and a little ingenuity, Bill Scott has built up retirement savings and real estate equity worth about $800,000 over the past 20 years. At the same time, the Alexandria, Va. single father hasn't neglected college funding for his eight- and 12-year-old daughters - both have 529 accounts worth $25,000.
How did he do it? When he joined the Marines after two years of college, Scott started saving $100 a month for education, thinking he'd eventually return to civilian life and finish school. He ended up staying in the Marines, but he didn't stop saving. "I never missed the extra money because I never let myself have it," Scott says. "As I had more, I increased the amount I saved."
Still, Scott feared that a master sergeant's pension and a small nest egg weren't enough to retire on. So seven years ago, he started buying properties to rehab and rent out. He's now pulling in around $5,000 a month in rent. Being a landlord on the side isn't for everyone, but it's helped Scott fund his retirement-- and his daughters' education. "You have to be creative," Scott says. "The biggest thing is to have a realistic goal and then find out how to achieve it."
2. Myth: You can't get rich with a 401(k)
When Tim O'Friel graduated from college, his brother gave him sage advice: Put as much as you can in a 401(k) and don't touch it. O'Friel took that to heart, saving 15% of his salary until he reached the IRS max ($15,500 in 2007). After 13 years of steady contributions, O'Friel, a contract negotiator for a manufacturing company in Thousand Oaks, Calif., has a 401(k) worth more than $200,000.
"It's not play money," he says. "I'm not trying to beat the market." O'Friel's hands-off approach became even easier a few years ago when Fidelity, his 401(k) administrator, started offering target-date retirement funds. He jumped at the chance to let professional managers keep an eye on his portfolio. O'Friel put all his money in Fidelity Freedom 2030, the fund that's geared to the year he plans to retire. He's confident in the fund's asset allocation - currently 83% in stocks, 17% in bonds - and he's happy not to have to consider it.
"I need my investments to be as safe as they need to be and as risky as is appropriate," O'Friel says. "And I do my best not to think about it."
3. Myth: Everyone has debt
Mary and Martin Pearsall have lived frugally, saved regularly and invested wisely in their 30 years of marriage. They've also managed to avoid the kind of crippling debt that can spoil the best-laid retirement plans. They steered clear of credit cards by living within their means, and they've dutifully paid the mortgage on their $250,000 Colorado Springs house. They now owe just $64,000.
"We've been careful without being draconian," Martin says. "We would never accumulate debt we couldn't handle."
Martin worked as an Episcopal priest until last year, and Mary has been a personal trainer and a business consultant. Now, with the help of a sizable inheritance from Martin's mother, they have a portfolio worth over $1 million. With no major debt to hold them back, the Pearsalls plan to scale back their work lives soon and travel, as they've been hoping to do for ages.
"I want to be disencumbered from having to be somewhere," says Mary.
For most people, during a time of economic growth and soaring markets, it's easy to believe that income will keep rising faster than debt payments. But in retirement you can no longer count on that unlimited potential for better pay. If you don't cut your debt load while you're still working, says Marilyn Dimitroff, a financial adviser in Bloomfield Hills, Mich., you will face the worst possible scenario: a retirement saddled with mounting debt and only a limited income to repay it.
4. Myth: A million dollars will cover you
A million dollars has long been the retirement portfolio gold standard, and why not? That's a rich sum. But let's get the bad news out of the way quickly. If you earn six figures and have no intention of living on an austerity budget when you stop working, you may need far more than $1 million to support yourself for the rest of your life.
The reason $1 million isn't all it was once cracked up to be: As a rule of thumb, you should plan to withdraw no more than 4% of your portfolio in your first year of retirement - otherwise you risk running out of money too soon.
You can nudge up your withdrawals slightly each year for inflation. So if you want an annual income of $80,000 - the retirement inflow needed to maintain the lifestyle of a worker earning $100,000 - and you and your spouse will collect $20,000 or so a year in Social Security benefits, $60,000 will have to come from your own savings. At a 4% withdrawal rate, that works out to a nest egg of roughly $1.5 million.
Of course, that's just a ballpark figure. With a pension or part-time work or more modest expectations, you can get by with much less than seven figures. The only number that really counts is the number you personally need to save based on your goals and resources. So start figuring.
Update these calculations every few years or whenever you have a major lifestyle upgrade. As you draw closer to the finish line, this exercise will give you an increasingly accurate picture of your target, million dollars or not.
5. Myth: Boomers will crash the market
Cross a stock market Armageddon off your list of fears. No question, the retirement of tens of millions of boomers in the coming decades will have a major impact on everything from health care (count on surging demand) to real estate (good-bye, suburbs, hello, beach house). And, the thinking goes, the generation that loaded up on stocks as they saved for retirement will crash the market once they sell those shares to pay for retirement.
Here's why that's not true.
Stock ownership is extremely concentrated among the very highest income brackets - those in the top 10% hold 68% of financial assets, according to a 2006 study by the Government Accountability Office. These wealthy investors are unlikely to be so strapped for cash that they have to sell their shares in a hurry. Instead, says George Walper, co-author of "Get Rich, Stay Rich, Pass It On," most affluent families intend to preserve assets for their heirs. Moreover, many baby boomers plan to stay in the work force longer than an earlier generation did, even into retirement, which would further reduce the need to sell shares abruptly.
6. Myth: Without a pension, you're doomed
It's true that baby boomers will get far less financial help from pensions than their parents did. Seeking to cut the cost of providing retirement benefits, more and more companies are dropping or freezing their traditional plans - the ones that your boss paid for, the ones that gave you a guaranteed monthly income for the rest of your life - leaving you with retirement accounts like 401(k)s that you have to fund and manage.
In 2005 only one in 10 private-sector employees was covered solely by a defined-benefit plan, compared with 37% in 1985, while the percentage of employees with 401(k) plans jumped to 63% from 28%. Without a pension you lose the prospect of a predictable lifetime paycheck. That's the story, anyway.
But the truth is, the defined-benefit pension was never a fabulous deal for most workers. Because the traditional pension is designed to reward longtime employees, the size of the pension depended in large part on how long you stayed with your employer. So if you switched jobs a few times during your career, as most people do, you lost most of the benefit.
According to the Employee Benefits Research Institute (EBRI), last year the average annual pension payout for those age 65 and older came to just $10,902. When held up against good old pensions, the 401(k) tends to get a bum rap. Because it's portable, a 401(k) allows you to have a normal, 21st-century flexible career and still put away enough to fund a more comfortable retirement. And if it's that "check a month for life" feeling you want, it's a simple matter to convert your 401(k) savings into a pension-like income stream.
7. Myth: Social Security won't be there
Social Security isn't going the way of the LP record soon. Sure, the headlines are alarming. In just 10 years the cost of Social Security benefits will outstrip the amount that workers pay into the system, according to government studies. And by 2041 the Social Security trust fund reserves will run out, unless Washington gets around to addressing the problem.
But that doesn't mean Social Security will shut down. Enough new money will continue to flow into the program from payroll taxes to fund 70% to 75% of scheduled benefits until 2081. Andwith a few reforms, Social Security could continue to pay full benefits. "Compared with theother issues we face, such as financing health care, fixing Social Security is child's play," says Alicia Munnell, head of the Center for Retirement Research at Boston College."You could raise the payroll tax by just one percentage point for both employers and employees, and you would be able to fund full benefits for the next 75 years."
So it's a good bet that you can count on something close to what retirees collect today. The real issue is how big even a full benefit will be. "Most Americans think that Social Security will replace more of their income than it really does," says Dallas Salisbury, president of EBRI.
For the average retiree, Social Security currently covers only 39% of pre-retirement income; and if you earn more than the maximum taxable amount ($97,500 this year), Social Security will replace just 26%, on average, of the income you earned on the job. And those percentages will drop over the next 20 years to 33% and 20%, respectively. That's largely because Medicare Part B premiums, which are deducted from your Social Security check, are increasing at a faster rate than your benefit's annual cost-of-living adjustments.
8. Myth: Your house can finance retirement
Treating your house as the ultimate retirement insurance is an easy trap to fall into. Even with the housing market in the doldrums, the five-year real estate bull market has likely left you feeling house-rich. According to a 2004 study by the National Economic Bureau, upper-income boomers ages 51 to 56 have a third of their net worth invested in their principal residence.
As recently as May, a survey of affluent boomers by financial adviser Bell Investments Advisors found that nearly 70% were relying on their homes as a retirement asset. Question is, will the strategy work? The answer is, not that well.
Why? Because it's hard to eat out on your home equity. You have to live somewhere. To turn your equity into cash, you can sell and then rent, move to a cheaper area or downsize. Most retirees prefer to stay put. Yes, you can do what a small but growing number of retirees are doing: Get a reverse mortgage, which is a loan against the value of your house that you don't have to pay back. (When you die or move out, the loan is paid off by the sale of the house, which means you may not be able to pass the home on to your children.)
But these loans give you much less than the value of your house. For homeowners ages 62 to 69, lenders will typically let you borrow just 49% of your home equity, says Wharton finance professor Nicholas Souleles.
The best way to look at your house is as a place to live, not a retirement account. So in the years leading up to retirement, don't overinvest in it with the idea that you can get that money out later. Keep your mortgage and other housing expenses to no more than 28% of your income, and don't prepay your mortgage instead of saving for retirement.
9. Myth: You're too old to start saving
Okay, it would have been better to start saving early, but let's face it: Most people don't. Still, there's hope for late starters (even those starting at 50). A few years of serious saving can make a huge difference to your quality of life in retirement.
"The first thing you need to do is take a reality pill," says Martha Priddy Patterson, director of employee-benefits analysis at Deloitte Touche. "Figure out what you have and how much you'll need to put away for a decent retirement."
Then launch into savings overdrive - you need to stash away as much as, or more than, someone seeking to retire early. You do have one thing going for you. Anyone over age 50 can also make catch-up contributions of as much as $5,000 to a 401(k) and an additional $1,000 to an IRA.
You might be surprised at how quickly your work can show results. Say you are a 50-year-old earning $100,000 with only $150,000 saved. Research by T. Rowe Price shows that if you put the max in your 401(k), including a catch-up contribution and a 50% match, plus invest another 5% outside the plan, you'll have $1.5 million by age 65, assuming you earn an average of 8% a year. With that, a true retirement will be no myth at all.
10. Myth: Short-term market swings don't matter
It's comforting to look at historical returns. Despite the occasional setback, the market continues to rise over the long run. In any 10-year period since 1926, you'd have made money in stocks 97% of the time; over 20 years you'd be ahead 100% of the time.
As long as you're patient and keep investing, you'll do well, right?
Not necessarily. When you're far from retirement, you can tough out even devastating bear markets, buying low while you do. Once you near your quit date, the rules change. Say you were within a few years of retirement in January 2000, on the eve of the March 2000 to October 2002 meltdown, when stocks plunged 44%.
If you were solely in stocks, it would have taken you 41/2 years just to break even. But if you'd had 60% of your portfolio in stocks, 30% in bonds and 10% in cash, you'd have had far milder losses of 21%. Once you start cashing out, a bear market of that magnitude can seriously jeopardize your standard of living. If youwere a retiree with that same all-stock portfolio in the 2000-02 bear market, those losses would mean you'd have only a 43% chance of seeing your money last until age 85 vs. 80% if you had a more conservative allocation.
11. Myth: Top priority is the kids' college
Unless you expect your children to support you in retirement, stop thinking like an all-nurturing parent. When you have kids, it's only natural to believe that college needs are more pressing than your far more distant retirement. A recent survey by the College Savings Foundation found that 53% of parents consider college savings their top priority, ahead of retirement or a house.
Problem is, this kind of thinking can lead you to pass up a big weapon: the power of compounding over time.
Save $100 a month from age 25 to 35, then stop and let the money grow. You'll have $182,000 in 30 years. Wait until you turn 45 to start saving and you'll have to put away $315 a month for 20 years to end up with the same amount.
Then too, if you come up short when it's time to pay for college, you (and your kids) can get help, from loans to outright grants. You can't apply for a retirement scholarship at age 65. That doesn't mean you should give up entirely on saving for college or other goals. Just make putting away money for retirement your top priority.
As for college, don't assume you have to save enough to pay the full price tag - for most families, a reasonable goal is to save for a third of the costs and make up the rest through financial aid, loans and your income when classes start and the bills roll in.
12. Myth: Decent savings plan = early retirement
Wouldn't it be great to call it a career in your fifties and spend the second half of your life doing whatever you want - with no money worries to get in the way? For many Americans that's the dream. Yet when you consider how much you have to overcome to retire early, that dream looks more like wishful thinking. You need a portfolio big enough to support you for some 30 or 40 years. You won't qualify for Medicare until age 65, and full Social Security benefits don't kick in until at least age 66. The only way to pull off this feat is through prodigious saving - at least a third of your take-home pay.
Still, this isn't a bad myth to strive to make true. With four out of 10 workers forced to leave their jobs sooner than planned because of layoffs or health problems or to care for an ailing relative, according to a McKinsey survey, it's hard to go wrong by saving and investing for the goal of an early exit date. If you choose to work longer, you'll have that much more secure an eventual retirement.
13. Myth: You're bound to mess up your 401(k)
It's true that if you set out to make a colossal mess of your 401(k), no one is going to stop you. You can cash out when you quit or borrow once too often. And now there's no longer a pension sponsor taking responsibility for paying you a certain benefit no matter what; all the investment risk falls to you.
But you're about to get a lot more help if you want it. Last year's Pension Protection Act gave employers the green light to take more responsibility for their workers' retirement savings. Now an increasing number of plans will give you investment advice or even account management. And when you start a job, your plan sponsor may automatically enroll you in the 401(k), raise your contribution level each year and direct your money into diversified investments, such as life-cycle or target-date funds, unless you opt out.
All of which means that even if you never make an independent investing decision, you can nevertheless wind up with a decent portfolio.
Still, you can probably do better with just a little effort. Forstarters, you should try to save the max ($15,500 this year) rather than the 6% or so of salary that many plans set as a default level. And while target funds work well, it's not hard to design a customized mix that suits your goals and risk tolerance.
With planning, discipline and a little ingenuity, Bill Scott has built up retirement savings and real estate equity worth about $800,000 over the past 20 years. At the same time, the Alexandria, Va. single father hasn't neglected college funding for his eight- and 12-year-old daughters - both have 529 accounts worth $25,000.
How did he do it? When he joined the Marines after two years of college, Scott started saving $100 a month for education, thinking he'd eventually return to civilian life and finish school. He ended up staying in the Marines, but he didn't stop saving. "I never missed the extra money because I never let myself have it," Scott says. "As I had more, I increased the amount I saved."Still, Scott feared that a master sergeant's pension and a small nest egg weren't enough to retire on. So seven years ago, he started buying properties to rehab and rent out. He's now pulling in around $5,000 a month in rent. Being a landlord on the side isn't for everyone, but it's helped Scott fund his retirement-- and his daughters' education. "You have to be creative," Scott says. "The biggest thing is to have a realistic goal and then find out how to achieve it."
2. Myth: You can't get rich with a 401(k)
When Tim O'Friel graduated from college, his brother gave him sage advice: Put as much as you can in a 401(k) and don't touch it. O'Friel took that to heart, saving 15% of his salary until he reached the IRS max ($15,500 in 2007). After 13 years of steady contributions, O'Friel, a contract negotiator for a manufacturing company in Thousand Oaks, Calif., has a 401(k) worth more than $200,000.
"It's not play money," he says. "I'm not trying to beat the market." O'Friel's hands-off approach became even easier a few years ago when Fidelity, his 401(k) administrator, started offering target-date retirement funds. He jumped at the chance to let professional managers keep an eye on his portfolio. O'Friel put all his money in Fidelity Freedom 2030, the fund that's geared to the year he plans to retire. He's confident in the fund's asset allocation - currently 83% in stocks, 17% in bonds - and he's happy not to have to consider it.
"I need my investments to be as safe as they need to be and as risky as is appropriate," O'Friel says. "And I do my best not to think about it."
3. Myth: Everyone has debt
Mary and Martin Pearsall have lived frugally, saved regularly and invested wisely in their 30 years of marriage. They've also managed to avoid the kind of crippling debt that can spoil the best-laid retirement plans. They steered clear of credit cards by living within their means, and they've dutifully paid the mortgage on their $250,000 Colorado Springs house. They now owe just $64,000.
"We've been careful without being draconian," Martin says. "We would never accumulate debt we couldn't handle."
Martin worked as an Episcopal priest until last year, and Mary has been a personal trainer and a business consultant. Now, with the help of a sizable inheritance from Martin's mother, they have a portfolio worth over $1 million. With no major debt to hold them back, the Pearsalls plan to scale back their work lives soon and travel, as they've been hoping to do for ages.
"I want to be disencumbered from having to be somewhere," says Mary.
For most people, during a time of economic growth and soaring markets, it's easy to believe that income will keep rising faster than debt payments. But in retirement you can no longer count on that unlimited potential for better pay. If you don't cut your debt load while you're still working, says Marilyn Dimitroff, a financial adviser in Bloomfield Hills, Mich., you will face the worst possible scenario: a retirement saddled with mounting debt and only a limited income to repay it.
4. Myth: A million dollars will cover you
A million dollars has long been the retirement portfolio gold standard, and why not? That's a rich sum. But let's get the bad news out of the way quickly. If you earn six figures and have no intention of living on an austerity budget when you stop working, you may need far more than $1 million to support yourself for the rest of your life.
The reason $1 million isn't all it was once cracked up to be: As a rule of thumb, you should plan to withdraw no more than 4% of your portfolio in your first year of retirement - otherwise you risk running out of money too soon.
You can nudge up your withdrawals slightly each year for inflation. So if you want an annual income of $80,000 - the retirement inflow needed to maintain the lifestyle of a worker earning $100,000 - and you and your spouse will collect $20,000 or so a year in Social Security benefits, $60,000 will have to come from your own savings. At a 4% withdrawal rate, that works out to a nest egg of roughly $1.5 million.
Of course, that's just a ballpark figure. With a pension or part-time work or more modest expectations, you can get by with much less than seven figures. The only number that really counts is the number you personally need to save based on your goals and resources. So start figuring.
Update these calculations every few years or whenever you have a major lifestyle upgrade. As you draw closer to the finish line, this exercise will give you an increasingly accurate picture of your target, million dollars or not.
5. Myth: Boomers will crash the market
Cross a stock market Armageddon off your list of fears. No question, the retirement of tens of millions of boomers in the coming decades will have a major impact on everything from health care (count on surging demand) to real estate (good-bye, suburbs, hello, beach house). And, the thinking goes, the generation that loaded up on stocks as they saved for retirement will crash the market once they sell those shares to pay for retirement.
Here's why that's not true.
Stock ownership is extremely concentrated among the very highest income brackets - those in the top 10% hold 68% of financial assets, according to a 2006 study by the Government Accountability Office. These wealthy investors are unlikely to be so strapped for cash that they have to sell their shares in a hurry. Instead, says George Walper, co-author of "Get Rich, Stay Rich, Pass It On," most affluent families intend to preserve assets for their heirs. Moreover, many baby boomers plan to stay in the work force longer than an earlier generation did, even into retirement, which would further reduce the need to sell shares abruptly.
6. Myth: Without a pension, you're doomed
It's true that baby boomers will get far less financial help from pensions than their parents did. Seeking to cut the cost of providing retirement benefits, more and more companies are dropping or freezing their traditional plans - the ones that your boss paid for, the ones that gave you a guaranteed monthly income for the rest of your life - leaving you with retirement accounts like 401(k)s that you have to fund and manage.
In 2005 only one in 10 private-sector employees was covered solely by a defined-benefit plan, compared with 37% in 1985, while the percentage of employees with 401(k) plans jumped to 63% from 28%. Without a pension you lose the prospect of a predictable lifetime paycheck. That's the story, anyway.
But the truth is, the defined-benefit pension was never a fabulous deal for most workers. Because the traditional pension is designed to reward longtime employees, the size of the pension depended in large part on how long you stayed with your employer. So if you switched jobs a few times during your career, as most people do, you lost most of the benefit.
According to the Employee Benefits Research Institute (EBRI), last year the average annual pension payout for those age 65 and older came to just $10,902. When held up against good old pensions, the 401(k) tends to get a bum rap. Because it's portable, a 401(k) allows you to have a normal, 21st-century flexible career and still put away enough to fund a more comfortable retirement. And if it's that "check a month for life" feeling you want, it's a simple matter to convert your 401(k) savings into a pension-like income stream.
7. Myth: Social Security won't be there
Social Security isn't going the way of the LP record soon. Sure, the headlines are alarming. In just 10 years the cost of Social Security benefits will outstrip the amount that workers pay into the system, according to government studies. And by 2041 the Social Security trust fund reserves will run out, unless Washington gets around to addressing the problem.
But that doesn't mean Social Security will shut down. Enough new money will continue to flow into the program from payroll taxes to fund 70% to 75% of scheduled benefits until 2081. Andwith a few reforms, Social Security could continue to pay full benefits. "Compared with theother issues we face, such as financing health care, fixing Social Security is child's play," says Alicia Munnell, head of the Center for Retirement Research at Boston College."You could raise the payroll tax by just one percentage point for both employers and employees, and you would be able to fund full benefits for the next 75 years."
So it's a good bet that you can count on something close to what retirees collect today. The real issue is how big even a full benefit will be. "Most Americans think that Social Security will replace more of their income than it really does," says Dallas Salisbury, president of EBRI.
For the average retiree, Social Security currently covers only 39% of pre-retirement income; and if you earn more than the maximum taxable amount ($97,500 this year), Social Security will replace just 26%, on average, of the income you earned on the job. And those percentages will drop over the next 20 years to 33% and 20%, respectively. That's largely because Medicare Part B premiums, which are deducted from your Social Security check, are increasing at a faster rate than your benefit's annual cost-of-living adjustments.
8. Myth: Your house can finance retirement
Treating your house as the ultimate retirement insurance is an easy trap to fall into. Even with the housing market in the doldrums, the five-year real estate bull market has likely left you feeling house-rich. According to a 2004 study by the National Economic Bureau, upper-income boomers ages 51 to 56 have a third of their net worth invested in their principal residence.
As recently as May, a survey of affluent boomers by financial adviser Bell Investments Advisors found that nearly 70% were relying on their homes as a retirement asset. Question is, will the strategy work? The answer is, not that well.
Why? Because it's hard to eat out on your home equity. You have to live somewhere. To turn your equity into cash, you can sell and then rent, move to a cheaper area or downsize. Most retirees prefer to stay put. Yes, you can do what a small but growing number of retirees are doing: Get a reverse mortgage, which is a loan against the value of your house that you don't have to pay back. (When you die or move out, the loan is paid off by the sale of the house, which means you may not be able to pass the home on to your children.)
But these loans give you much less than the value of your house. For homeowners ages 62 to 69, lenders will typically let you borrow just 49% of your home equity, says Wharton finance professor Nicholas Souleles.
The best way to look at your house is as a place to live, not a retirement account. So in the years leading up to retirement, don't overinvest in it with the idea that you can get that money out later. Keep your mortgage and other housing expenses to no more than 28% of your income, and don't prepay your mortgage instead of saving for retirement.
9. Myth: You're too old to start saving
Okay, it would have been better to start saving early, but let's face it: Most people don't. Still, there's hope for late starters (even those starting at 50). A few years of serious saving can make a huge difference to your quality of life in retirement.
"The first thing you need to do is take a reality pill," says Martha Priddy Patterson, director of employee-benefits analysis at Deloitte Touche. "Figure out what you have and how much you'll need to put away for a decent retirement."
Then launch into savings overdrive - you need to stash away as much as, or more than, someone seeking to retire early. You do have one thing going for you. Anyone over age 50 can also make catch-up contributions of as much as $5,000 to a 401(k) and an additional $1,000 to an IRA.
You might be surprised at how quickly your work can show results. Say you are a 50-year-old earning $100,000 with only $150,000 saved. Research by T. Rowe Price shows that if you put the max in your 401(k), including a catch-up contribution and a 50% match, plus invest another 5% outside the plan, you'll have $1.5 million by age 65, assuming you earn an average of 8% a year. With that, a true retirement will be no myth at all.
10. Myth: Short-term market swings don't matter
It's comforting to look at historical returns. Despite the occasional setback, the market continues to rise over the long run. In any 10-year period since 1926, you'd have made money in stocks 97% of the time; over 20 years you'd be ahead 100% of the time.
As long as you're patient and keep investing, you'll do well, right?
Not necessarily. When you're far from retirement, you can tough out even devastating bear markets, buying low while you do. Once you near your quit date, the rules change. Say you were within a few years of retirement in January 2000, on the eve of the March 2000 to October 2002 meltdown, when stocks plunged 44%.
If you were solely in stocks, it would have taken you 41/2 years just to break even. But if you'd had 60% of your portfolio in stocks, 30% in bonds and 10% in cash, you'd have had far milder losses of 21%. Once you start cashing out, a bear market of that magnitude can seriously jeopardize your standard of living. If youwere a retiree with that same all-stock portfolio in the 2000-02 bear market, those losses would mean you'd have only a 43% chance of seeing your money last until age 85 vs. 80% if you had a more conservative allocation.
11. Myth: Top priority is the kids' college
Unless you expect your children to support you in retirement, stop thinking like an all-nurturing parent. When you have kids, it's only natural to believe that college needs are more pressing than your far more distant retirement. A recent survey by the College Savings Foundation found that 53% of parents consider college savings their top priority, ahead of retirement or a house.
Problem is, this kind of thinking can lead you to pass up a big weapon: the power of compounding over time.
Save $100 a month from age 25 to 35, then stop and let the money grow. You'll have $182,000 in 30 years. Wait until you turn 45 to start saving and you'll have to put away $315 a month for 20 years to end up with the same amount.
Then too, if you come up short when it's time to pay for college, you (and your kids) can get help, from loans to outright grants. You can't apply for a retirement scholarship at age 65. That doesn't mean you should give up entirely on saving for college or other goals. Just make putting away money for retirement your top priority.
As for college, don't assume you have to save enough to pay the full price tag - for most families, a reasonable goal is to save for a third of the costs and make up the rest through financial aid, loans and your income when classes start and the bills roll in.
12. Myth: Decent savings plan = early retirement
Wouldn't it be great to call it a career in your fifties and spend the second half of your life doing whatever you want - with no money worries to get in the way? For many Americans that's the dream. Yet when you consider how much you have to overcome to retire early, that dream looks more like wishful thinking. You need a portfolio big enough to support you for some 30 or 40 years. You won't qualify for Medicare until age 65, and full Social Security benefits don't kick in until at least age 66. The only way to pull off this feat is through prodigious saving - at least a third of your take-home pay.
Still, this isn't a bad myth to strive to make true. With four out of 10 workers forced to leave their jobs sooner than planned because of layoffs or health problems or to care for an ailing relative, according to a McKinsey survey, it's hard to go wrong by saving and investing for the goal of an early exit date. If you choose to work longer, you'll have that much more secure an eventual retirement.
13. Myth: You're bound to mess up your 401(k)
It's true that if you set out to make a colossal mess of your 401(k), no one is going to stop you. You can cash out when you quit or borrow once too often. And now there's no longer a pension sponsor taking responsibility for paying you a certain benefit no matter what; all the investment risk falls to you.
But you're about to get a lot more help if you want it. Last year's Pension Protection Act gave employers the green light to take more responsibility for their workers' retirement savings. Now an increasing number of plans will give you investment advice or even account management. And when you start a job, your plan sponsor may automatically enroll you in the 401(k), raise your contribution level each year and direct your money into diversified investments, such as life-cycle or target-date funds, unless you opt out.
All of which means that even if you never make an independent investing decision, you can nevertheless wind up with a decent portfolio.
Still, you can probably do better with just a little effort. Forstarters, you should try to save the max ($15,500 this year) rather than the 6% or so of salary that many plans set as a default level. And while target funds work well, it's not hard to design a customized mix that suits your goals and risk tolerance.
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