Retirement should inspire thoughts of mixed drinks on the beach and long afternoons with the grandkids. But for many people, just mentioning the word spurs anxiety.
Younger Americans are waiting too long to put money away, middle-aged workers rarely make up for lost time and people approaching retirement hope to hold onto their jobs long enough to save just a few dollars more.
Most people know they should be doing more to save for retirement, yet too few of us are doing the right thing. As a result, about half of Americans are in store for a lower standard of living and less financial freedom once they quit working and rely on a fixed income.
Part of this looming retirement crisis is driven by a host of common myths and misconceptions about retirement that have seeped into our collective consciousness. Correcting them may help you feel more confident in your ability to prepare for your golden years—and banish those sinking feelings of anxiety.
Myth #1: Social Security Is Going Away
No federal program is more important for retirement than Social Security. About half of American retirees rely on Social Security for half of their income while about a quarter need it to provide 90% of their monthly retirement budget. Estimates suggest that 10 million seniors would be in poverty but for Social Security.
Yet a shockingly high number of people think that Social Security will start falling apart in the not-too-distant future. Just 15% of Americans age 18 to 29 believe that they’ll receive the current levels of benefits by the time they retire, according to a recent Pew Research Center survey. Nearly 42% think they’ll only have a sliver of what they’d get now, and another 42% believe the whole thing will be gone by the time they retire. And those figures are actually optimistic considering more than half of Americans aged 30 to 49 aren’t expecting anything from Social Security.
There’s a reason so many Americans sound like Chicken Little, and it has to do with how we pay for Social Security. Current retirees’ benefits are funded by today’s payroll taxes and the Social Security trust fund. In other words, your Social Security tax dollars aren’t earmarked for future you the minute they’re taken out of your paycheck. They instead go to people who previously funded the Social Security benefits of others, bringing the whole thing full circle.
This pay-as-you-go model isn’t necessarily a bad thing. In an ideal world, Social Security would be paying out less per year than it took in, and any extra proceeds would be kept as cushion in the trust.
But lately, as American life spans have grown, benefit payments have exceeded tax income, drawing down the trust. According to current projections, the trust fund could run dry by 2035 if the program’s current weaknesses aren’t fixed. And if the trust fund were depleted, benefits would be immediately reduced by approximately 25 percentage points.
Some politicians encourage all the pessimism, pushing the “Social Security is going bankrupt” narrative like a mantra, so it’s easy to understand why so many expect so little. But these fears are totally overblown.
The Truth: Social Security Needs Help, But It Isn’t Going Anywhere
Even if nothing were done to fix the Social Security trust fund and benefit cuts happened, monthly checks in 2035 would still be higher than they are now. That’s because Social Security benefits increase at a greater rate than current levels of inflation.
But on a more fundamental level, do you really think politicians will just let Social Security run dry when so many depend on it and older voters are the most motivated and consistent part of the electorate? Moreover, retirement security is one of the few policy themes that draw bipartisan support as the overwhelmingly bipartisan vote tally for 2019’s SECURE Act attested.
Americans want a fix. Addressing Social Security’s long-term funding was the top priority for voters, according to a recent Transamerica survey, edging out increasing health affordability and beefing up Medicare funding.
Shoring up Social Security’s long-term finances isn’t only positive in its own right, but it may, paradoxically, give people more confidence to actually save on their own. Without full confidence that Social Security will be around, people may feel that the amount of money they need to save for retirement is insurmountable. And if you aren’t going to be able to save enough, why save at all?
But if you believe Social Security is around for the long-haul, you may believe that you actually have more control over a secure retirement and chip in more.
Myth #2: Stock Market Returns and Home Appreciation Are the Biggest Retirement Risks
The vicissitudes of the stock market are constantly in the news. Every nightly news broadcast includes a quick summary of why equities bounced up or down, and by how much, just before the weather report. Meanwhile, homeowners are constantly obsessing over the estimated value of their real estate
This is totally understandable. A home and retirement accounts comprise the bulk of most people’s net worth. In a recent study, Wenliang Hou, who worked as a research economist at Boston College, looked at data from the biennial Health and Retirement Study (HRS) to gauge the median retirement wealth of households led by people who were 65.
Among households that reported having savings and household wealth, the typical married couple in 2016 had median housing wealth of more than $191,000, almost $290,000 in retirement savings and nearly $50,000 in other financial wealth (in 2020 dollars).
Given these numbers, it’s no surprise that people view their home value and investment portfolios as the primary determinant of their future retirement possibilities. But a narrow focus on these numbers can be problematic when it comes to retirement planning.
That’s because retirees tend to be overly pessimistic about the anticipated future performance of the stock market and their home values, notes Hou. And they tend to pay less attention to more pressing concerns, such as outliving their money.
The Truth: Longevity Is Your Number One Risk
Hou’s study, aptly titled How Accurate Are Retirees’ Assessments of Their Retirement Risk?, looked at what retirees say they are most afraid of and whether those fears correlate with reality.
And what retirees say is that they’re most afraid of how well their investments will perform. Less than half of those surveyed in 2016, for example, said that they expected the stock market to rise in value in the following year. The same was true in 2014, 2012 and 2010. Earlier research suggested that this pessimism was true even before the Great Recession of 2007-2009.
Moreover, retirees expect a ton of market volatility. More than a fifth of respondents continually expect stocks to drop by 20% in the following year while another fifth consistently think stocks will rise by that much. These fears about volatility are unjustified. On a total return basis, the S&P 500 has gained ground in each of the past 10 years, except 2018, when it declined by less than 5%. Even a broader view demonstrates that stocks tend to rise much more than they fall, which is why financial planners want you to invest in equities in the first place.
When it comes to housing, 53% of respondents believed their home would rise in value over the next year while a number of respondents thought the value of their home could swing widely. Almost 20% of respondents thought their home would lose 30% or more of its value.
And yet, between 1975 and 2019, the All-Transactions House Price Index for the U.S., “bounce[d] between the plus- and minus-20% range for most of the time, and never [got] 40% above or 30% below,” wrote Hou.
Hou’s data tells us that retirees have an exaggerated sense of market volatility. Meanwhile, they underestimate how long they have left to live. According to Hou’s calculations, the average 65-year-old man in 2016 had a 66% chance of making it to 80 while a similarly aged woman has a 75% shot. Yet male respondents pegged their chances at just 58% while only 64% of women thought they had another 15 years left.
Retirees, then, should spend more time focusing on ways to cope with the costs of longevity. Converting some retirement savings into low-cost fixed annuities, like a qualified longevity annuity contract (QLAC), for instance, reduces the risk of outliving your funds.
Myth #3: You Can’t Afford To Save
Perhaps the biggest myth of all is that people don’t believe they can save at all.
A 2018 National Institute on Retirement Security survey found that two-thirds of millennials have nothing put away for retirement while only a third participate in their employer-sponsored retirement plan. This last number, though, is at least in part influenced by the fact that many don’t meet certain 401(k) eligibility requirements, like working a minimum number of hours..
Even among people who are saving, the amounts being saved aren’t encouraging. People aged 25 to 29 years old had a median retirement savings balance of $5,600 in 2013, according to data published by the Employment Benefit Research Institute (EBRI). Four years later, they had just $5,500. Similar trends are seen among workers in their 30s.
Millennials are not without financial challenges. Many graduated from college in the midst of a nasty recession or the slow economic recovery that followed. Many have astronomically high levels of student loans. And many work part time or for employers that don’t offer retirement plans. Toss in the recent pandemic restrictions, which fell heavily on younger workers in the hospitality industry, and saving for retirement can feel like a hopeless aim.
“Saving for retirement may be the last thing that comes to mind for young Americans, especially amid the pandemic,” said Catherine Collinson, CEO and president of nonprofit Transamerica Institute.
Workers may feel that they’ll start saving once they start to earn good money, but those intentions aren’t often followed up on. A bias documented by Hersh Shefrin and Richard Thaler in the late 1980s shows that people are most tempted to spend current income, which makes it challenging to meet aggressive savings goals once you have to put money aside.
Truth: You Can Start Now
While lawmakers and corporate HR departments could do a lot more to encourage retirement saving, there’s no reason to wait for their help.
The retirement crisis has not been driven by a lack of access to tax-advantaged retirement plans. Everyone has access to a traditional or Roth individual retirement account (IRA) that they can contribute to, even if they don’t get a plan from their employer.
That’s not to say access to a plan alone solves the problem. Younger people may feel like they don’t make enough money to start saving. In a recent interview with Forbes Advisor, Sarah Asebedo, assistant professor at Texas Tech University, defined saving for retirement as a habit you need to cultivate early, even if your means are limited.
“It may seem small, but start by saving a dollar,” said Asebedo. “It helps develop the right habits and perspective. If your income rises in the future, you’ll have a mindset that will allow you to apply your habits and behavior to a situation where you have more money.” And anything you’re able to save for retirement now, no matter how small, gets to benefit from the compounding power of time on investment returns.
Once you accept the premise that you’re capable of living on less than you earn, the idea of savings becomes much more palatable. And once you realize that retirement myths are only that—myths—you can get to work crafting a retirement plan that works for your needs and possibilities.