When Fidelity Investments held its first-ever Retirement IQ Survey earlier this year, the results were dismaying. It appears that most Americans are clueless about some basic retirement finance subjects. And if you don’t understand these fundamental aspects of pre- and post-retirement finance, how can you possibly come up with a retirement plan that works?
Here are some topics you should study up on if you want a financially stress-free retirement.
The stock market’s historical returns
When the market crash at the start of the Great Recession trashed everyone’s retirement savings portfolios, many workers reacted by pulling out of the stock market and putting all their money into “safer” investments such as bonds. By selling out after the crash, they turned those paper losses into real, and devastating, losses — and then they missed the huge market rebound that followed.
Even today, many people refuse to buy stocks because they believe they’re sure to lose money. In reality, the stock market has enjoyed a positive return in 30 out of the last 35 years — a fact that only 8% of Fidelity’s survey-takers were aware of — even though that time period has included multiple market crashes. And while stocks are unquestionably riskier than bonds, they also produce far higher long-term returns. Given that many Americans aren’t able to save as much for retirement as they should, getting the highest possible returns on those investments is crucial.
Length of retirement
When asked how long their retirement savings would need to last if they retired at age 65, 38% of Fidelity’s survey respondents gave an answer of 12 to 17 years. In reality, if you’re turning 65 today, your expected lifespan is about 22 years. That means you have a 50% chance of living more than 22 years and a 50% chance of living less than 22 years. So if you were to retire around age 65, you’d need to have enough money saved up to last you at least 30 years in order to have a reasonable chance of not outliving your money. If you underestimate how long your retirement is likely to last, as many survey respondents did, you’re setting yourself up for…