worried retirementDo you think you'll be ready for retirement?

If that question inspires you to fits of nervousness, night terrors and sweaty palms, you're not alone. Most Americans aren't saving anywhere near enough money to live out their golden years comfortably. Let's take a look at some of the more eye-opening statistics:

  • Americans 10 years away from retirement have saved just $78,000 on average, even though the Employment Benefit Research Institute says the average worker will need to have saved $900,000 to maintain his or her lifestyle after retirement at 65.
  • The average American has saved just 7% of what he or she hoped to retire on.
  • 25% of middle-class Americans now say they plan to work until age 80.

Many people put the blame for the savings deficits on 401(k)s, now the most favored vehicle for retirement funding. A generation ago, most private-sector workers received pensions, which have since largely been replaced by the tax-free retirement fund. Many raid their savings in cases of "income shock" like divorce, sickness, or job loss, and others lost much of their savings in the bursting of the tech and housing bubbles.

One expert put it bluntly, saying that linking investing and retirement has been a recipe for disaster, as most individuals turn out to be poor investors. They fall victim to many of the familiar traps such as buying high and selling low on nervousness, focusing on short-term gains instead of long-term needs, and not diversifying their portfolio.

What You Can Do About It

For those people still saving for retirement, one of the best ways to accumulate a nest egg is with a Dividend Reinvestment Plan.

Buying shares of Dow heavyweights such as AT&T (T) or Verizon (VZ) will guarantee you a yield of 5%, and investors can boost their income to double-digit yields by investing in companies that return nearly all of their capital to shareholders, such as MLPs and REITs. The beauty of a DRIP plan, as they're known, is that reinvesting your dividends enables your savings to grow much faster.

The graph below shows the difference that reinvesting dividends would have made in returns from Altria (MO) had you owned it since the late '60s.


That difference is huge! Without reinvesting dividends, the stock would've returned 11,000% (still outstanding), but with the reinvestment you would've gotten $2.76 million back on an original investment of just $1,000.

What's also great about this investing strategy is that dividends act as a natural floor on a stock price, since the yield will go up if the price falls. If you're buying shares every quarter, a dip in price only means you can get more of the stock.

Look to invest in "dividend aristocrats," dependable companies that have increased their dividends in each of the last 25 years, and avoid stocks -- other than REITs and MLPs -- that pay out more than 80% profits in dividends. A payout level that high may not be sustainable.

What If Time Isn't on Your Side?

Those closer to retirement without the time to make meaningful gains through investing may have to get creative with their decisions.

Retiring abroad, for instance, has become one option for stretching your money out. More than half a million American seniors are now expats, and the number is growing, with many moving to locales in nearby Latin American countries that offer cheap living expenses, warm weather, and relatively short trips back to the U.S. New technologies such as Skype also make it easier to keep in touch with loved ones.

Even with the average Social Security check paying about $1,200 per month, expat retirees can live well in places like Grenada, Nicaragua, or Ecuador on even less. While a sense of adventure may be necessary to make a move abroad, these American enclaves should grow as many baby boomers are forced to confront the hard choices ahead.

Others have advocated making retirement into a "life sabbatical." Here, as the plan goes, retirees spend their first three years of retirement relaxing and enjoying themselves, but also with their eyes out for an activity that interests them and would allow them to earn some money.

Gallery: 10 Stocks for the Next 50 Years

Describing the process, Bob Adams, CEO of New Global Initiatives, says, "When your sabbatical is over, you should have found a new line of work that will help you enjoy the rest of your life and pay for whatever makes it comfortable ... Take full retirement only when you must, when you can no longer be productive."

Another option for cash-strapped property owners is reverse mortgages, which can offer another revenue stream while allowing you to stay in your home.

Whatever decisions you make, sticking your head in the sand or doing a "faith-based" retirement is probably the worst idea. As Bob Adams says, "A retiree who has run out of money and has no idea what to do about it is one of the saddest people you will ever meet, and one of the most difficult to help."

Motley Fool contributor Jeremy Bowman holds no positions in the companies mentioned in this article.

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Reverse mortgage loans can provide you additional income in your retirement years which can improve you quality of life.


September 13 2013 at 12:57 AM Report abuse rate up rate down Reply

Is this writer kidding???? Sure, live in a third world country at 65 where the water is questionable, sanitation is marginal, and all the other comforts you have come to take for granted are no longer assured. $1200 per month? That will barely get you by. Medicare won't cover you and you probably won't want to put all your faith in the local medical establishment. 401Ks? A boon to Wall Street which convinced---rightly so---corporations that it would benefit their bottom line (no more pension liabilities); CEO's could jack their pay package and get stock bonuses as the company stock would now rise with profits; and Wall Street boomed from 1982 with all that niave investment cash looking to be managed through mutual funds. Check out the astronomical growth of the mutual fund industry after 401Ks were put in place of defined benefit pensions.

June 12 2012 at 2:46 PM Report abuse rate up rate down Reply

The bottom line about why people will not have enough for retirement is spending, needs vs wants, wants, wants, wants and having to have everything they see at the Wal-mart, K-mart, and Macys.

Junk, junk and more junk from China. People's houses are overloaded with crap they do no need but obsessively buy because they saw it on t.v..

I just turned fifty and I realized that about myself a couple of years ago and I just stopped buying everything I wanted, and I started saving for my retirement and I fully plan to retire at 60.

I save 28% of my monthly take home for retirement.

Of course I won't have a new car or jewelry or big screen t.v. or all the last crap that people see on the shopping channel that they think they need to have, but I will be free to do as I please and that means more than anything to me.

I see people well into their sixties at work complaining about how they can't retire, how they can't save!

However nearly every day they are buying some nick knack or shinning thing(rings, necklaces or other nonsense). They eat out instead of bring lunch. They have to have HBO and cable, they go on expense vacations. At work we have a 5% matching 401K and they won't even take advantage of that!

No one is to blame but you!!! Take responsibility!

I did away with my cable, land line, and I don't impulse buy anymore. My 12 year old car drives just fine. I don't need 20 pairs of shoes, nor do I need a closet full of clothes I never wear. I have a week and half of working clothes and just one pair of shoes for each situation such as one pair of gym shoes, one pair of shoes when I wear a dress and one pair when I wear pants.

Just saying, take responsibility!

May 26 2012 at 4:18 PM Report abuse rate up rate down Reply

This is more of an advertisement than a normal article.

Social Security was started precisely because ordinary middle income (and below) Americans can't save enough to retire on since people started living well past the age of 60. This 401(k) business is a sham. Yes, you should save for retirement, but nobody but the rich and government employees (including politicians) can afford to live on retirement income that is more than a pittance.

For ordinary people, the best plan is to buy an affordable house with a 30 year fixed mortgage that they can pay off before they are forced to retire, plan to work as long as they are physically able (or their employer discards them), buy a long term care insurance policy when they're still relatively young, and skip life insurance once their kids are raised.

May 24 2012 at 1:43 PM Report abuse +2 rate up rate down Reply

typical, blow smoke article. our biggest enemy to our retirements is inflation and/or dollar devaluation. the s.s.i people know this very well. future outlays are factored by these scenarios. ssi factors inflation to raise payments. of course the trust fund has been margined for general fund spending, leaving it technically broke. as the ssi people will say, retire later or get less. state and city pension funds have that same issue. they have future outlays to fund retirements but are falling short of the funding obligations. and guess what. we the tax payers will have to bail out both scenarios. our standard of living will decline so others can prosper.

May 24 2012 at 12:17 PM Report abuse rate up rate down Reply

One must consider that you cannot earn any money on investments unless you are selling deravitives. This is the main reason you need 900K. I doubt that most Americans will be able to retire. Others will live like kings especially those with a good pension and others will be on the street bumming cans of tuna. Your politicians are robbing you!!!

May 24 2012 at 11:25 AM Report abuse +1 rate up rate down Reply

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May 10 2012 at 3:46 PM Report abuse -1 rate up rate down Reply

It is a failure of our education system in this country that most people don't recognize or realize how much money they need to save to have a comfortable retirement. This country is a nation of spenders and abusers of credit. This is fostered and encouraged by the banks and the media. It's more important to own a lot of stuff and drive a nice car then to save. Unfortunately, most pension plans have gone the way of the Dodo Bird and no longer exist or are available to the average working person. This makes most individuals, particularly those working for small companies entirely responsible for their own retirement savings. Many if not most working people are not doing a very good job of saving as they live from pay check to pay check. Social security alone was NEVER meant to provide for one's entire retirement lifestyle. Too many people don't understand this and think the Gov't is going to take care of them or some miracle is going to happen (i.e. win the lottery). If you want to have any hope of retiring comfortably and come from average moderate means, you better start saving a lot more. Start early and contribute often to your plan. And, remember that the money you save is for retirement, not for loans to buy unnecessary BS. First rule of financial planning is "pay yourself first."

May 09 2012 at 3:43 PM Report abuse +4 rate up rate down Reply

First of all, a 401K is NOT a "tax free" retirement plan. It is a tax deferred retirement plan like a regular IRA (as opposed to a Roth IRA). With most 401K retirement savings plans, the earnings including capital gains, interest and dividends accumulate "tax deferred". This means you pay no taxes on that accumulated money until taken in retirement. When the money is drawn upon in retirement it is THEN (generally and mostly) taxable. On the other hand, the interest dividends and earnings on a Roth IRA's proceeds when drawn out in retirement is indeed tax free. There is a big difference between tax deferred and tax free. The writer of this article should know this difference.

May 09 2012 at 3:30 PM Report abuse +3 rate up rate down Reply
1 reply to Artie's comment
James Carrano

Your 100% correct.......and these numbers will change with future generations.........

May 24 2012 at 12:15 PM Report abuse rate up rate down Reply

It should be pointed out and stressed that no dividend is guaranteed. The dividend payments are not legal obligations on the part of the company, as bond interest payments are. Companies cut or drop heir dividends all the time. The author "guarantees" 5% if you invest in a company with a 5% yield. However, as stated, there is no such guarantee. The article should be rewritten especially since this distinction will not be obvious for the audience for whom the article is targeted.

Sorry if someone already pointed this out.

May 09 2012 at 2:20 PM Report abuse rate up rate down Reply