When it comes to planning for retirement, Americans have some basic facts wrong.
In fact, shockingly wrong.
Fidelity Investments’ 2021 State of Retirement Planning Study revealed three huge misunderstandings about investing and retirement that working-age Americans widely share.
All of these errors could prove costly to anyone hoping to build a solid financial foundation for retirement.
Misbelief No. 1: The stock market falls most of the time
This one is a doozy.
Nearly three-quarters (72%) of respondents said the stock market has recorded negative returns more frequently than positive ones over the past 35 years.
In reality, the market was up for 26 out of the past 35 years.
Yes, there have been soaring highs and plummeting lows in that time. But anyone who invested in an index fund 35 years ago and simply held on cannot reasonably be anything less than thrilled with that decision.
Why does the mistaken belief about stock market performance matter for retirement? Because if you believe the stock market is a rigged casino where the bettor usually loses, you are likely to avoid investing as much as you probably should.
And odds are good that your retirement will be significantly poorer for that decision.
For more about retirement investing, check out “7 Keys to Stress-Free Retirement Investing.”
Misbelief No. 2: Saving 5 times your income will secure a good retirement
Half of all survey respondents said saving just five times their income — or even less — will result in having enough money to retire.
That would mean a worker earning $50,000 would need to save just $250,000 — or less — before giving up the rat race.
Now, it’s possible you could save such a scanty amount and still survive throughout retirement. If you retire later in life, live very frugally and invest well, you might get to life’s finish line with a few coins remaining in your pocket.
In truth, millions of people retire with very little in savings, relying largely on their Social Security check to get by.
But you’re taking a risk. That is especially true if you suffer through a severe market downturn early in retirement, or if you end up living as a retiree for several decades.
Just 25% of respondents said you would need to save between 10 and 12 times as much money as you earned in your last full year of work, as Fidelity says many financial professionals recommend.
Setting a savings goal that high might sound like overkill, and some financial professionals — although by no means all — would say it is. But it’s always better to have more cash than less in case life doesn’t turn out how you plan.
Misbelief No. 3: You can safely withdraw up to 15% of retirement savings every year
In the survey, 28% of respondents said financial professionals would suggest a withdrawal rate of 10% to 15% of retirement savings every year.
Taking out money at that pace is about as safe as trying to cross the Grand Canyon on a high wire.
Fidelity suggests withdrawing no more than 4% to 6% of your savings annually. That range is even higher than the 3% many financial advisers suggest as the upper limit.
Why is it dangerous to withdraw too much? Dip too deeply into savings year in and year out, and you can easily run out of money before you run out of life. That’s especially true if you draw down savings when markets are falling, or if you simply live longer than you expected.
Correcting mistaken beliefs
Perhaps it is no surprise that Americans hold such misguided beliefs about retirement. The American school system traditionally has done a poor job of educating students about the financial realities that face them as adults.
But even if Mr. Smith, Ms. Anderson or some other teacher failed you, it’s never too late to learn. And class is in session as soon as you enroll in Money Talks News’ retirement course, The Only Retirement Guide You’ll Ever Need.
This 14-week boot camp is intended for those who are 45 or older, but people of all ages will find it valuable. It maps everything you need to know about retiring, including Social Security “secrets” and how to invest the right way.