Often times, without even our knowing it, our minds will formulate stories to make sense of the world around us. When we have sufficient information about a topic, such stories can be beneficial: They condense our knowledge into easily summarizable narratives, allowing us to conserve mental energy.
Unfortunately, I believe that retirement in America has become a topic that's dominated by misinformation and misunderstanding. While no personal finance writer intends to do this, when we present retirement information out of context, we aren't giving our readers a full picture. Specifically, I think we as a group lean too far toward inciting panic about the general retirement situation in America -- and I'm just as guilty as anyone else.
In short, we're guiding you to create false stories.
To combat that, I'd like tackle some popular retirement myths that have embedded themselves in many of our stories.
1. Americans are unusually bad at saving for retirement
If we made a 100-yard-long timeline of the human experience on Earth and laid it out on a football field, it wouldn't be until just before the goal line that the idea of "retirement" -- not to mention "work" -- came into the lexicon. Retirement is an extremely modern idea. For the first 99.9 yards on that gridiron, people simply lived, and the division between work, leisure, and life didn't really exist.
That's important to understand, because if it seems like we're bad at saving for retirement, we're holding ourselves up to a somewhat unrealistic measuring stick. As fellow Fool Morgan Housel pointed out three years ago, "We have a retirement problem. A very serious one that shouldn't be discounted. But it is nothing new."
2. Your spending will go up in retirement
Last year, finance pundit Suze Orman earned my ire for saying that, "Most likely, you will spend more when you're retired. ... The older you get, the more medications you'll likely need." This mirrors what many believe -- that any dip in their spending in one area during retirement will be outpaced by increases in healthcare spending.
The facts simply don't support this. While healthcare spending does increase in retirement, it is more than offset by drops in other areas. Retirees typically spend less on food, as they make more of their meals at home; they don't spend as much on transportation, as they no longer commute; the list goes on.
Morningstar's David Blanchett -- who has crunched the numbers -- put it well when he said: "There is a growing body of literature exploring the spending habits and tendencies of retiree households. The majority of the studies note that consumption tends to decline at retirement ... Overall ... the real change in annual spending through retirement is clearly negative ."
3. Social Security won't be around for you
There's actually nothing wrong with believing this if it motivates you to save more money during your working years. But if you're losing sleep over the eventual dissolution of Social Security, let's review the facts.
The Old Age and Survivors' Insurance (OASI) Trust Fund -- which is what provides most retirees with their monthly checks -- is predicted to run dry some time in the early 2030s. When that happens, assuming no other changes are made in terms of how the program is funded, the trustees predict that individuals' benefits will have to be cut by around 25%.
Why won't they disappear entirely? Because current workers will continue to pay their FICA taxes. As long as those taxes are paid -- which they have been continuously since the 1930's -- there will still be money coming into the program's coffers that it can use to pay ongoing benefits.
4. Most retirees are unhappy with their circumstances
Given that we seem to read regularly about the terrible financial state of today's retirees, it would seem reasonable to assume that their emotional state is tenuous. But that's not what retirees say when you ask them.
A joint study by Merrill Lynch and Age Wave found the following:
- 76% of those between 65-74 say that they "often feel happy," the highest percentage of any age group.
- 71% of the same cohort say they "often feel content," the highest percentage of any age group.
- 72% age 65-74 say that they "often feel relaxed," again, the highest percentage of all ages.
- Only 12% of those aged 65 or older report "often feeling anxious," the lowest percentage of any age group.
Why is this? I have my own guesses, but in the end, I'm sure every situation is different. But broadly speaking, retirees seem to be the happiest, most well-adjusted group of adults in America.
5. You'll be able to retire on your own terms
While the four myths I busted above paint an optimistic picture, it's worth noting that there are some assumptions that are dangerously wrong. Foremost among them: that many of us will be able to work into our 70s to help fund our retirements and make ends meet, if necessary.
What we often fail to appreciate is that things happen to us as we age: Our bodies start to falter; we get laid off; we become less enticing to potential employers. At the end of the day, 43% of people apply for Social Security at 62, the earliest age possible.
What's the takeaway from all of this? Don't panic. While it's important for you to stay focused on meeting your financial goals, the world is not coming to an end. And more than likely, you'll be very happy in retirement.