Terrible Advice You Should Ignore

What would you do if someone said you could eat more candy and work out less, and you'd still be healthy? If you're like me, you'd be excited -- but you'd probably think it was too good to be true.

Those were my thoughts when I read about the estimates of Harvard economist David Laibson. According to Laibson, about 10 percent of Americans actually save too much money for retirement. Yes, dear reader, just when you thought you had investing and planning under control, it turns out you might have to reconsider.

Though Laibson might not say it, these estimates imply that if you're saving too much for retirement, you could be spending more along the way. And that's where the alarm bells come in for me. I liken that to saying, "Sure, stay home from the gym and eat a couple of cookies." Knowing my own sense of discipline, I'd quickly be a couch potato with a heart condition, so I'd hate to see what that kind of thinking would do to my finances.

So where's he coming from?
I don't make a habit of disagreeing with Harvard economists, but here's the deal with this one. Laibson's 10% supersavers generally work for companies that offer solid retirement contribution plans. When the savings from those plans get added to Social Security payments, pension benefits, and housing wealth, it ends being more dough than these folks need once they retire.

Of course, the magic behind this line of thinking is that it depends on guaranteed Social Security payments and "relatively paternalistic" pension plans. These may be fine assumptions if you're retired now, or if you're retiring soon, but for anyone who began working in the last 10 years, or who will start working at any point in the future, these are dubious propositions. After all, the Social Security Administration itself stated that it will only be able to pay out 78% of scheduled benefits by 2041, meaning that average retiree benefits at that point will be worth less than a minimum-wage job pays! And with pensions being cut and frozen left and right, those can't always be relied upon either. Retirement is when you're supposed to spend time with your grandkids, travel the world, and play golf. It's tough to do that on minimum-wage money.

But that's not all!
But the broader danger here is that learning about the 10% of people who supposedly save too much could lead you to underestimate how difficult it is to save for retirement in the first place. Traditionally, retirement savings have rested on a three-legged stool made up of Social Security benefits, pension payments, and personal savings. With Social Security's problems, and the phasing out of pensions, Americans may be forced to shoulder most of the burden on their own. What does that mean in dollar terms? The Fool generally suggests that you should plan to withdraw 4% of your nest egg every year in retirement. This could mean you might need around $1 million or more in personal savings in order to enjoy your pre-retirement lifestyle.

The best (legal) way I can think of for coming up with $1 million is by building a winning portfolio of stocks. And any portfolio needs to start with some solid dividend payers. By collecting and reinvesting dividends over the long term, you give yourself the best chance possible for outsized returns.

Take an investment in Johnson & Johnson (NYSE: JNJ  ) , for example. If you'd bought 100 shares of the pharmaceutical giant in 1980, and invested all of your dividends, you'd be sitting on an 8,000% return and more than $580,000 today! That's not too shabby.

If you're looking for more companies like Johnson & Johnson, here are a few candidates. All are solid, sustainable dividend-payers with market-leading positions.

Stock

Industry

Market Cap

Dividend Yield

Abbott Labs (NYSE: ABT  )

Pharmaceuticals

$87 billion

2.9%

Nokia (NYSE: NOK  )

Communications Equipment

$49 billion

3.9%

Valero (NYSE: VLO  )

Refining

$11 billion

3.2%

3M (NYSE: MMM  )

Industry Conglomerates

$60 billion

2.4%

Coca-Cola (NYSE: KO  )

Beverages

$130 billion

2.9%

Source: Yahoo! Finance.

Another great place to find dividend stocks is the Fool's Income Investor advisory service. Dividend hound James Early has compiled his list of the 50 best dividend stocks out there, including six he thinks should anchor every portfolio. In addition to Johnson & Johnson, he's also a big believer in spirits maker Diageo (NYSE: DEO  ) . To find out the rest of his "Buy First" stocks, you can take a 30-day free trial at no risk. Simply click here.

Matt Trogdon does not own any of the companies mentioned in this article. Diageo, Johnson & Johnson, and Coca-Cola are Income Investor recommendations. 3M, Nokia, and Coca-Cola are Inside Value recommendations. The Motley Fool owns shares of SYSCO and has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (52)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2010, at 9:32 PM, HarleyRiderLBC wrote:

    As a public school teacher in California, I am not entitled to social security because of the double dipping law. That's fine with me because I never liked the return on SS (funny how a gov't organization has interesting initials). Teaching is my second career and the prospect of being with teenagers in my 70's is grim. Even though I have CalTrs pention, I ran the numbers. I bit the bullet and got a 403b and have been building a small portfolio of stocks with good solid dividend returns. I am having to play catch up because the worse investment I made was a marriage whereby the lawyers got the return on my money. At 44 I will be debt free in 5 years and stash 1000 bucks a month in investments. The best thing college taught me is how to live frugal. I guess it's easy for tenured professor at Harvard to talk about other peoples money with the compensation he receives in Ivy League academia. Thanks for an insightful article, I am sure young people will eat up his advice. I guess if you live long enough you learn to stop listening to experts and do your own rolled up sleeves research. I would rather have more than I can spend than wishing for a life I could not afford to spend a dime on.

  • Report this Comment On January 19, 2010, at 9:34 PM, HarleyRiderLBC wrote:

    As a public school teacher in California, I am not entitled to social security because of the double dipping law. That's fine with me because I never liked the return on SS (funny how a gov't organization has interesting initials). Teaching is my second career and the prospect of being with teenagers in my 70's is grim. Even though I have CalTrs pention, I ran the numbers. I bit the bullet and got a 403b and have been building a small portfolio of stocks with good solid dividend returns. I am having to play catch up because the worse investment I made was a marriage whereby the lawyers got the return on my money. At 44 I will be debt free in 5 years and stash 1000 bucks a month in investments. The best thing college taught me is how to live frugal. I guess it's easy for tenured professor at Harvard to talk about other peoples money with the compensation he receives in Ivy League academia. Thanks for an insightful article, I am sure young people will eat up his advice. I guess if you live long enough you learn to stop listening to experts and do your own rolled up sleeves research. I would rather have more than I can spend than wishing for a life I could not afford to spend a dime on.

  • Report this Comment On January 20, 2010, at 2:42 AM, jaketen2001 wrote:

    Wow. Another real piece of trash article. 'TMF generally suggests 4%/yr withdrawl, this COULD mean you need 1 million' Um. Ok buddy. Lets see, logic in trash can, check. 'The best (legal) way to make a million.. is to invest in stocks' (let me guess, your stocks). J&J, wow, brilliant. '8,000 %, thats not too shabby'. No its not. Wide breadth of topic, shallow content. Save save save, invest invest invest. No, that hasnt gotten anyone in to trouble lately.

  • Report this Comment On January 20, 2010, at 3:31 AM, Talmar wrote:

    I'm pretty convinced there are people who come to TMF just to trash these articles. For example, jaketen2001. Are you suggesting that the article is wrong, that we SHOULDN'T save? That we SHOULDN'T invest? That we should spend all our money on things that will be used up or obsolete well before we retire and then fall on our swords at 65? I don't know how you could seriously suggest that this article, though a little simplistic, is actually bad advice. I realize TMF gains some credibility by letting these guys post and not removing their utterly useless comments, but personally I'm at the point where I no longer want to read the comments on TMF posts because they're dominated by naysayers who seem like their only agenda is to tear down everything Fools have to say.

  • Report this Comment On January 20, 2010, at 9:54 AM, TMFTrog wrote:

    Thanks for the comment, Harley. I personally don't agree that one could ever save "too much." With advances in medicine and technology, someone who's 55 needs to consider the possibility that he or she is still going to live for 30 or more years, and be ready for that.

    Talmar, you've hit it on the head. The Fool is all about letting our community members express their opinions...it's one of the things that sets it apart. But I don't really see the "saving and investing" idea going away any time soon :)

    Fool on!

  • Report this Comment On January 20, 2010, at 8:19 PM, thedofca100 wrote:

    >>pensions being cut and frozen left and right, those can't always be relied upon either. <<

    You leave out the biggest thing with pensions. In our case after 39 years with United Airlines the bankruptcy court chose to cancel our pensions and give that money, at the end of bk, to the executives as a bonus for getting the company through bk.. For those with smaller pensions or who had been retired longer, the PBGC covered a lot of it, for my husband who had just retired and had a significant pension we lost 75% of our promised pension with the PBGC covering only 25%. Since my husband retired we have taken every dime out of the market and have missed the last market downturn. We won't be playing the Vegas stock investment game again but for those of you who have the insiders' scoop, that's great. I'll take CDs even at 3 1/4%

  • Report this Comment On January 21, 2010, at 1:44 PM, n8larson wrote:

    The very idea of 'saving too much' inherently assumes a fixed retirement age. Not correct. The more you save, the sooner you get to retire, even if that's not a 1-to-1 relationship. And the sooner, the better, IMHO.

    And ... um... "insiders scoop"? Here's the scoop: There isn't one. The 'secrets' of the "Vegas stock investment game" are all sitting right here for anyone who wants them. Just like basic home improvement, reasonable long-term success in investing just takes time, tools, and confidence.

  • Report this Comment On January 25, 2010, at 10:03 AM, gliderMomma wrote:

    Well I would rather save too much then to little. It is a crazy world and you can not be quite prepared for it's surprises. Besides I am sure my kids would be more then thankful that I "saved too much" when I croak.

  • Report this Comment On January 26, 2010, at 11:08 AM, foolsonthird wrote:

    Oh, shut up and quit your whining, all of you double dippers and government pensioners. We need to cut the pensions and force conversion into 401k plans so you all can retire like the rest of us whilst injecting capital AND A VESTED STAKE in the market. The biggest problem is the military pensions, paid out at the end of 20 years of 'service'. So at 38 years old, these guys are getting paid (fed tax free and some state tax free too!!!) for 40 plus years from my hard-earned taxes. Plus medical for the whole fam-damily, dependents! It may have been true once upon a time that the military was not paid on par with the civilian private industry, but now that is no longer the case. Add medical and pension and all the breaks they receive, and the largest fraternity in the free world is sucking the rest of us dry. Pensions should be outlawed, we should all be in the same boat, and payouts should only start at retirement age, whether set at 65 or 67.5, whatever your generation. There's your solution!

  • Report this Comment On January 27, 2010, at 2:50 PM, Tcostant wrote:

    THat is a nice problom to. I want to have "to much" money in retirement.

    More money to gamble with.

  • Report this Comment On January 27, 2010, at 3:03 PM, jaketen2001 wrote:

    I am not saying that people should not save and invest. I am saying that the assumptions made in the article are without any substantial basis. The writer of this article was critical of a paper written by someone. But he was basically just critical of the title of the article, that some people save too much. I am sure there are many details of the paper that this writer did not pick up on or never took the time to understand. I assume the Harvard economist is not talking about us average Joes saving some money.

  • Report this Comment On January 28, 2010, at 1:36 PM, Gemuk wrote:

    One thing that we as citizens of this county need to start becoming aware of is that while Social Security itself will run into trouble by 2041 as referenced in this article, Medicare/Medicaid will become insolvent much sooner. Unless something significant is done, this insolvency in Medicare/Medicaid will bankrupt the federal government. This will impact the federal governments ability to make good on the money that it has "borrowed" from the Social Security program. Thereby bankrupting Social Security sooner. So if anyone thinks that Social Security will really be around much longer they need to look at the sorry financial state of our federal government.

    For the guy bashing the military pension. Since we have a volunteer military do you have any idea how much you would have to pay a Soldier/Sailor/Marine/Airman to perform their duty if they didn't have the lure of a pension with a retirement at a relatively young age. None would make a career of the Military otherwise. That's a small price to pay by this country for those that spend at times 50% of their time away from their families and who deal with death either in combat or otherwise as a part of their daily lives. Stop and ask anyone who has spent a real amount of time in the military these days and they will tell you they know of more than one friend/comrade in arms who has died in the line of duty.

  • Report this Comment On January 31, 2010, at 10:23 AM, NoVaAmPro wrote:

    As someone who wore a military uniform, I take strong objection to the idea that military pensions are unearned and undeserved. Never mind that the whole idea of a professional standing army (founded by the Romans, improved on by Napoleon) rests on commensurate reward for a lifetime of service, the job that my former comrades-in-arms are now being called upon to do deserves, at the very least, half pay at 20 years. Did you know that members of the military also pay taxes? That they also have to pay (granted a very small amount) into the Tricare military health care system? That retirees' benefits are even now being scaled back? And that those 38-year-old retirees you chose to bash actually start 2nd careers or small businesses that reinvest back into the country that is paying such a generous retirement package? By the way, military and government employees also have a 401(k), it's called the Thrift Savings Plan, and I paid into while I was in the Air Force and pay into it now that I am in the Foreign Service (along with the FS pension system, which I am required to pay into and which is not available until I hit at least age 50). We can already see a day when the pension system may not be exactly as it was promised. But don't tell us we don't deserve it, unless you've experienced it first-hand.

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