Thirteen Retirement Myths

1. Myth: You need a big income to have a big nest egg

With planning, discipline and a little ingenuity, Bill Scott has built up retirement savings and real estate equity worth about $800,000 over the past 20 years. At the same time, the Alexandria, Va. single father hasn't neglected college funding for his eight- and 12-year-old daughters - both have 529 accounts worth $25,000.

How did he do it? When he joined the Marines after two years of college, Scott started saving $100 a month for education, thinking he'd eventually return to civilian life and finish school. He ended up staying in the Marines, but he didn't stop saving. "I never missed the extra money because I never let myself have it," Scott says. "As I had more, I increased the amount I saved."

Still, Scott feared that a master sergeant's pension and a small nest egg weren't enough to retire on. So seven years ago, he started buying properties to rehab and rent out. He's now pulling in around $5,000 a month in rent. Being a landlord on the side isn't for everyone, but it's helped Scott fund his retirement-- and his daughters' education. "You have to be creative," Scott says. "The biggest thing is to have a realistic goal and then find out how to achieve it."

2. Myth: You can't get rich with a 401(k)

When Tim O'Friel graduated from college, his brother gave him sage advice: Put as much as you can in a 401(k) and don't touch it. O'Friel took that to heart, saving 15% of his salary until he reached the IRS max ($15,500 in 2007). After 13 years of steady contributions, O'Friel, a contract negotiator for a manufacturing company in Thousand Oaks, Calif., has a 401(k) worth more than $200,000.

"It's not play money," he says. "I'm not trying to beat the market." O'Friel's hands-off approach became even easier a few years ago when Fidelity, his 401(k) administrator, started offering target-date retirement funds. He jumped at the chance to let professional managers keep an eye on his portfolio. O'Friel put all his money in Fidelity Freedom 2030, the fund that's geared to the year he plans to retire. He's confident in the fund's asset allocation - currently 83% in stocks, 17% in bonds - and he's happy not to have to consider it.

"I need my investments to be as safe as they need to be and as risky as is appropriate," O'Friel says. "And I do my best not to think about it."

3. Myth: Everyone has debt

Mary and Martin Pearsall have lived frugally, saved regularly and invested wisely in their 30 years of marriage. They've also managed to avoid the kind of crippling debt that can spoil the best-laid retirement plans. They steered clear of credit cards by living within their means, and they've dutifully paid the mortgage on their $250,000 Colorado Springs house. They now owe just $64,000.

"We've been careful without being draconian," Martin says. "We would never accumulate debt we couldn't handle."

Martin worked as an Episcopal priest until last year, and Mary has been a personal trainer and a business consultant. Now, with the help of a sizable inheritance from Martin's mother, they have a portfolio worth over $1 million. With no major debt to hold them back, the Pearsalls plan to scale back their work lives soon and travel, as they've been hoping to do for ages.

"I want to be disencumbered from having to be somewhere," says Mary.

For most people, during a time of economic growth and soaring markets, it's easy to believe that income will keep rising faster than debt payments. But in retirement you can no longer count on that unlimited potential for better pay. If you don't cut your debt load while you're still working, says Marilyn Dimitroff, a financial adviser in Bloomfield Hills, Mich., you will face the worst possible scenario: a retirement saddled with mounting debt and only a limited income to repay it.

4. Myth: A million dollars will cover you

A million dollars has long been the retirement portfolio gold standard, and why not? That's a rich sum. But let's get the bad news out of the way quickly. If you earn six figures and have no intention of living on an austerity budget when you stop working, you may need far more than $1 million to support yourself for the rest of your life.

The reason $1 million isn't all it was once cracked up to be: As a rule of thumb, you should plan to withdraw no more than 4% of your portfolio in your first year of retirement - otherwise you risk running out of money too soon.

You can nudge up your withdrawals slightly each year for inflation. So if you want an annual income of $80,000 - the retirement inflow needed to maintain the lifestyle of a worker earning $100,000 - and you and your spouse will collect $20,000 or so a year in Social Security benefits, $60,000 will have to come from your own savings. At a 4% withdrawal rate, that works out to a nest egg of roughly $1.5 million.

Of course, that's just a ballpark figure. With a pension or part-time work or more modest expectations, you can get by with much less than seven figures. The only number that really counts is the number you personally need to save based on your goals and resources. So start figuring.

Update these calculations every few years or whenever you have a major lifestyle upgrade. As you draw closer to the finish line, this exercise will give you an increasingly accurate picture of your target, million dollars or not.

5. Myth: Boomers will crash the market

Cross a stock market Armageddon off your list of fears. No question, the retirement of tens of millions of boomers in the coming decades will have a major impact on everything from health care (count on surging demand) to real estate (good-bye, suburbs, hello, beach house). And, the thinking goes, the generation that loaded up on stocks as they saved for retirement will crash the market once they sell those shares to pay for retirement.

Here's why that's not true.

Stock ownership is extremely concentrated among the very highest income brackets - those in the top 10% hold 68% of financial assets, according to a 2006 study by the Government Accountability Office. These wealthy investors are unlikely to be so strapped for cash that they have to sell their shares in a hurry. Instead, says George Walper, co-author of "Get Rich, Stay Rich, Pass It On," most affluent families intend to preserve assets for their heirs. Moreover, many baby boomers plan to stay in the work force longer than an earlier generation did, even into retirement, which would further reduce the need to sell shares abruptly.

6. Myth: Without a pension, you're doomed

It's true that baby boomers will get far less financial help from pensions than their parents did. Seeking to cut the cost of providing retirement benefits, more and more companies are dropping or freezing their traditional plans - the ones that your boss paid for, the ones that gave you a guaranteed monthly income for the rest of your life - leaving you with retirement accounts like 401(k)s that you have to fund and manage.

In 2005 only one in 10 private-sector employees was covered solely by a defined-benefit plan, compared with 37% in 1985, while the percentage of employees with 401(k) plans jumped to 63% from 28%. Without a pension you lose the prospect of a predictable lifetime paycheck. That's the story, anyway.

But the truth is, the defined-benefit pension was never a fabulous deal for most workers. Because the traditional pension is designed to reward longtime employees, the size of the pension depended in large part on how long you stayed with your employer. So if you switched jobs a few times during your career, as most people do, you lost most of the benefit.

According to the Employee Benefits Research Institute (EBRI), last year the average annual pension payout for those age 65 and older came to just $10,902. When held up against good old pensions, the 401(k) tends to get a bum rap. Because it's portable, a 401(k) allows you to have a normal, 21st-century flexible career and still put away enough to fund a more comfortable retirement. And if it's that "check a month for life" feeling you want, it's a simple matter to convert your 401(k) savings into a pension-like income stream.

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