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% 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.

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 up 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!
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, 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 a 7,700% return and more than $575,000 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.

Source: Yahoo! Finance.

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This article was originally published Jan. 19, 2010. It has been updated.

Matt Trogdon owns shares of Kraft Foods and PepsiCo. Johnson & Johnson and PepsiCo are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. Motley Fool Options has recommended a roll your diagonal call position on PepsiCo. The Motley Fool has a disclosure policy.