Most Americans are serious about saving for their retirement. The dream of finally being free from being tied to a job, being able to travel and do what you want, has always appealed to many people. And that’s why retirement planning has become such a large and lucrative industry. But many people unwittingly make mistakes in their retirement planning, led astray by common myths and misperceptions that cause them to make the wrong decisions that end up costing them dearly when it comes time for retirement. Here are a few of them that you should be especially wary of.
Myth One: You Can Assume 7-8% Average Annual Growth
It’s long been assumed that you can assume average annual stock market growth of 7-8%. That’s what most investment advisers, financial professionals, and pension fund managers have taken as gospel for the past several decades. In fact, if you look back at the S&P 500 since its expansion to cover 500 stocks in 1957, the index has averaged about 7% annual growth. That’s pretty good. But its recent record is not that great.
Like the Dow Jones Industrial Average, the S&P 500 saw phenomenal growth throughout the 1980s and 1990s. From a level of around 117 at the beginning of 1982, the S&P 500 grew to over 1,400 by the beginning of 2000. That’s a twelvefold increase in just 18 years, or an annualized growth rate of around 15%. Unfortunately, like the Dow, the S&P 500 has only about doubled in the last 18 years from 2000-2018, averaging less than 4% annualized growth.
Given that much of the rise in the S&P 500 since 2000 has occurred in the past two-and-a-half years, and that stock markets seem to have paused their meteoric rise, what are the odds that the S&P 500 will move back to a 7% growth rate? It’s far more likely that stock markets will drop in the coming years before resuming upward growth, but will that upward growth get back on trend?
Had the S&P 500 continued growing at 7% annually since 2000 it would now be at nearly 5,000 points. Were it to continue to grow at 7% annually from now on, it would be at 5,500 points in 10 years. How likely is that to happen? In other words, assume that growth going forward will be 4-5% annually at best over the long term. Better to plan for that and be pleasantly surprised by better growth rather than assume better growth and end up with not enough money come retirement.
Myth Two: Stocks Are Always the Best Way to Gain and Maintain Wealth
The stock market boom of the ‘80s and ‘90s made many people wealthy. With nearly 15% average annualized returns it was hard not to make money in stock markets. But now that average returns have plummeted over the past two decades, growing your investment assets isn’t as easy as just plunking your money into a 401(k) or IRA account.
Most financial and investment advice is still stuck in the ‘80s and ‘90s mentality, remembering the 1982-2000 boom and thinking that a return to that era is just around the corner. Of course, that’s what people have been saying for 20 years, but it’s easy to see that those predictions haven’t come to fruition. Had the S&P 500 continued at its 1982-2000 growth rate until today, it would now be at over 18,000 points and the Dow Jones would be well over 145,000 points. Obviously that hasn’t happened.
While stocks can be a good way to gain wealth during boom times, they’re subject to cycles. After 1929 there was a long recovery until the mid-1950s to mid-1960s boom, then a stagnation from 1966-1982, the long boom until 2000, and lots of ups and downs since then. If you happened to invest during the boom times, you did great. If you invested during the periods of stagnation and instability, you didn’t do so well.
That’s why alternative assets such as gold can be so beneficial in both maintaining and steadily growing wealth. Over the past two decades gold has average annualized gains of over 8.5%, versus less than 5% for stock markets. And since the gold window was closed in 1971 gold has also outgrown stock markets, albeit by a lesser margin. That means that for both the medium and long terms gold has been shown to be a superior investment.
That doesn’t mean you should rush out and plow all of your money into gold, but as part of a well-balanced and diversified portfolio gold can provide a very valuable service not just as an inflation hedge or protector of wealth during financial crisis, but also as a source of increasing wealth in and of itself. Stocks aren’t the only game in town.
Myth Three: Social Security Is Enough to Retire On
Social Security was never intended to be the ultimate retirement safety net. It was intended to be a backstop for those who for whatever reason couldn’t rely on a pension or who didn’t have enough money saved up to be able to live comfortably in retirement.
But because Social Security is a transfer payment welfare system, the first recipients of Social Security benefits made out very well, leading many people to believe they would fare just as well. Instead of acting as a backstop, the existence of the Social Security system actually disincentivized savings by encouraging many people to rely on the government.
Because Social Security is an inter-generational transfer system, it relies on an increasing population of taxpayers to pay for the benefits of retirees, and that has proved to be its undoing. Social Security benefits already outstrip the receipts of Social Security taxes, and the Social Security “trust fund” that was accumulated when receipts exceeded payouts is slowly being eaten away. The fund is expected to run out in 2034, at which point retirees will receive only about three-quarters of their expected benefits. Unless Social Security taxes are hiked, or benefits are decreased, millions of retirees will find themselves in a bind if they expect to live off their already meager Social Security checks.
That’s why it’s so important to come to the realization that your retirement is dependent solely on you. Expecting pension funds or Social Security to come through, without creating your own backup source of retirement savings is playing with fire. But if you save as much as you can, invest in the right types of assets, and make sure that your retirement and investment assumptions aren’t too rosy, you should end up being able to retire in comfort no matter what may transpire between now and then.