6 retirement myths you need to ignore
Ever find yourself around the watercooler discussing with co-workers how your 401(k) is performing—likely leading to the increasingly popular "I'll never be able to retire" discussion? It's becoming a bit of a modern-day lament, begging the question: Why do Americans have this doom-and-gloom attitude about their golden years' financial situation?
Academic, institutional and media reports tend to serve up workers with warnings—often wrapping up with a "save now and save more" silver lining. It doesn't seem to be inspiring the masses. According to a Wells Fargo study, 37 percent of Americans expect to work until they are too sick to work or die.
Given the current state of America's retirement, it's worth taking a look at how we have arrived at this point--and, in particular, the retirement myths that have persisted for decades but aren't doing current savers as much good as they (and you) probably think. We asked retirement experts to weigh in.
Let's start with the biggest retirement myth of all....
Myth # 1: The 401(k) was created to boost your retirement dollars.
Not really. You might not have given it a second thought as to why you have a 401(k), the retirement savings standard, but the truth is, it happened by chance—not by some deliberate congressional plan.
It all started with the Revenue Act of 1978, spearheaded by Rep. Al Ullman, D-Ore., a staunch believer in tax cuts. In the 184-page bill was a rather simple and short provision called 401(k). It was essentially buried in the report and overlooked by nearly everyone. That is, until a Pennsylvania benefits consultant named Ted Benna noticed that the provision—established for such things as deferred-stock bonus plans—could be applied to joint tax-differed employee and company accounts. By 1982 companies such as Johnson & Johnson, PepsiCo, J.C. Penney and Hughes Aircraft Company were using 401(k) plans.
The kicker is that Benna has been critical of 401(k)s over the years, implying that he helped create a monster. He envisioned the plans to be simple plans on par with pensions, but more recently Benna has said he would "blow up the system" and start over again with something new.
(Read more: Where Americans are retiring abroad)
Myth # 2: You need 80 percent of your current income level in retirement.
The idea that you need 80 percent of your current salary in retirement might be wildly exaggerated. This "rule of thumb" is taken to task in a new report by David Blanchett, Morningstar's head of retirement research: "When we modeled actual spending patterns over a couple's life expectancy ... the data shows that many retirees may need approximately 20 percent less in savings."
The report concluded that while the 80 percent rule is a decent number, the actual replacement goal varies depending on pre- and post-retirement lifestyles. Which means you may have more money than you think to invest today in additional (and critical) elder needs, including ... (cue the next retirement myth, please)
Myth # 3: You're too young to start paying for long-term care.
Long-term care could be the next major retirement crisis in America. The Department of Health and Human Services expects that some 70 percent of Americans over the age of 65 will need it at some point. Currently, only about 8 million Americans have long-term care coverage.
The topic has been getting more attention over the last few years as rates have been skyrocketing. The reason is that insurers didn't count on the fact that so few people would drop their coverage—about 1 percent—and that care costs would rise so much. It's forced many insurers to get out of the game. For policyholders, rates are rapidly rising an average of 40 percent.
The best move to make is to grab a long-term care policy while you are still working. "If you want long-term care insurance to pay some of the cost, you'll need to health qualify, and that starts to get tricky after age 65," said Jesse Slome, executive director of the American Association for Long-Term Care Insurance.
When is the best age to start putting your dollars in these policies? "The sweet spot is mid–50s to mid–60s," Slome said.
(Read more: Overlooked health-care costs can destroy retirement planning)
Myth # 4: Don't ever touch your principal.
The 4 percenters—those who tout the idea that you never withdraw more than that from your portfolio annually—might be too dogmatic in their belief. The rule is meant to establish a withdrawal rate that pulls out dollars earned from interest and investment gains, allowing your principal to remain intact. However, touching your principal is not out of the question.
"It really is okay to spend your capital. That's what it is there for," said Dr. Tony Webb, senior research economist at the Center for Retirement Research at Boston College.
Not touching your capital really applies to wealthy individuals who generate high returns and want to pass their capital onto heirs. For those individuals with $150,000 to $1 million in retirement savings, Webb said they should consider using some of the principal to supplement their income.
The myth and mantra of "Never touch it" starts in a worker's retirement-saving days. According to Webb, many individuals carry over that mentality into retirement and are afraid to touch their nest egg. "The idea is to spend down in retirement; that's why you save. Saving is not a goal in itself."
(Read more: Planning for your retirement: Making your money last)