The Biggest Retirement Myth!

[mlk_man]

The Biggest Retirement Myth!

“People have got to get out of their mindset that they can get out of their office at 55, get in their Winnebago and drive around for the rest of their days. They can't afford it.”
– Sylvester Schieber, Retirement Policy Guru
Where will your retirement income come from? Social Security and pensions used to be the traditional sources of retirement income… but, in most cases, they aren't enough to provide full support!

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I’m going to examine three of the big retirement investment lies constantly being peddled to you by the so-called “experts” that you should not listen to.
Big Lie No. 1: Buy Large-Cap Stocks That Pay Dividends
What they’re saying is that you should go out and buy “feel-good stocks” such as Coke, Wal-Mart and Microsoft. Their argument is that if these companies can’t make it in the market, neither can any other stock. And even if their shares don’t appreciate, you’ll make money on the dividends.
Here’s the real story:
If you own Microsoft (MSFT), you haven’t made any money for the last seven years. But you have been handed a “nice” 0.32% dividend each year. Wonderful!
Your shares in Wal-Mart (WMT) over the same period have been skidding downward for six years… but you did get paid a 1.12% annual dividend…
Coca-Cola (COKE) is nothing to write home about, either. It lost you 20% from January 2005 to January 2006, but paid a 2.3% dividend…
Another perennial favorite, IBM, lost more than 25% from 2001 to 2006 but eked out 0.90% in dividends.
I could go on and on, but you get my point.
This approach would allow inflation to erode your savings so fast that you’d end up not having enough money to get you through your retirement. Even if you decided to go with a large-cap mutual fund, you’ve only averaged a 5.8% return over the last five years. Not too terrible -- but not too great, either.
At 6% per year, even in a tax-deferred retirement plan, it’ll take you about 12 years to double your money. Throw in the impact of inflation, and it’ll take more than 20 years to double your money!


Sincerely,
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A.M. Sosnowski,
Editor, Diligent Investor

[EW_ret]

I did an analysis on a friend's future retirement in the FERS system. They started working for Department of Navy at age 22, in January 2002. At MRA of 58 with 35 years in FERS, the estimated percentage, based upon High Three Year average salary, was 35% FERS pension and 16% Social Security. Since thet are considered a highly paid government worker, social security is a much smaller share of retirement. The third leg of TSP must be invested wisely to pick up 30%+ of the High Three. The estimated inflation was 3.0% with 1.5% real wage growth over the next thirty years. They are currently ND4 (GS12-6) and contibuted 7% to TSP.

[Brett]

I’m socking away all I can, currently 17%. Does that put a crimp on my lifestyle? Yes. But, when I retire, I won’t be paying that anymore and in effect boosting my retirement by that amount plus receiving payments from the fund.

My goal was to lower my standard of living now, so that when I retire the amount I would receive would be comparable. Doing an estimate consider what you won’t be paying anymore: retirement, TSP, Medicare and SSI if you are FERS.

[Sunnyskies]

Oops -- I just bought the RV!!! ;)

[Birchtree]

I can only hope it was a Fleetwood model - I own their stock.

[Sunnyskies]

No such luck -- bought used Coachmen and got a great deal!! These toys depreciate too quickly for me to think about buying new.

[azanon]

Good advise for an example of many things to not do, but its certainly not the biggest lie out there. Its the first ive heard of it, and i don't know anyone who just bought 2 or 3 large cap stocks that pay dividends as an exclusive source of retirement income. I'm sure we could think of another 100 things someone shouldn't do, but most of those things would probably be intuitive.

Most people buy stocks through mutual funds these days, and, for the record, a large-cap value fund (the closest mimic to what you're describing) have performed quite well over any time range you could select. Oh sure, you cant live off the dividends since even a large cap value fund only pays about 2.3% in dividends, but if you throw in capital appreciation, you're looking at greater than 10% average annual return over the long haul.