Why do people don't save for retirement

Ellen Rinaldi, who leads Vanguard's Investment Counseling & Research group, offered some observations to help investors overcome a few common myths and help achieve their long-term goals.

Myth #1: It's too late for me to start saving for retirement

This myth can lead to inaction—whereas the reality is that it's never too late to start saving.

Of course, the best strategy is to start saving early, because $10,000 saved in your 20s or 30s is going to be worth a lot more when you are 65 than $10,000 saved in your 40s or 50s. But no matter where you are in life, you'll benefit from putting your money to work for you now.

As Ms. Rinaldi explained, "The first thing to do is to maximize the contributions you make to your 401(k) plan, if you have one, and to make sure you're getting the full employer match. Second, look at a traditional IRA or a Roth IRA as a supplement. Finally, if you're 50 or over, take advantage of the catch-up contributions that are available to you—they can help you boost your savings in a dramatic way."

Myth #2: I got a late start, so I should invest aggressively to compensate

With this approach, you're trying to make up for lost time, but it may expose your savings unnecessarily to dramatic ups and downs in the market.

If stock markets drop precipitously—say, when you're 58—you may find yourself with insufficient savings, and you may have to work longer, save more, or spend less when you do retire.

Myth #3: My retirement savings need to last only 10 or 20 years

The pitfall of believing this myth is that it might cause you to run out of money.

Life expectancy tables tell us that for every 65-year-old couple, there's a 72% chance that at least one will live to age 85, and an almost 20% chance that one will live to 95. "Today, you have to plan on your retirement income lasting 25 or 30 years, not 10," said Ms. Rinaldi. Consider an investment strategy designed for asset growth and for an income stream.

Myth #4: I need a dozen or more funds for my portfolio to be diversified

Diversification is a good way to spread your risk, reducing the impact of a steep downturn in any one asset class or market sector. The danger here lies in misinterpreting diversification.

"For lots of people, holding either a target retirement fund—which is actually a basket of mutual funds—or a combination of a total stock market index fund and a total bond market index fund will provide all the diversification they need," said Ms. Rinaldi. "You don't need to hold a lot of funds to be diversified, if the funds you do hold are well-diversified themselves."

Myth #5: When I retire I should move out of stocks

This myth also can put you at risk of outliving your money.

"If an investor moves completely out of equities into bonds, this may allow inflation to eat up more of their return, because they're removing the potential for greater growth from their portfolio," said Ms. Rinaldi. Over long periods, returns from an all-bond portfolio are likely to be more modest and may not keep pace with inflation.

"Holding a well-diversified portfolio is key," said Ms. Rinaldi.