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Middle class savings rates: Waiting to win the retirement lottery?

January 13, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Are you waiting to win the retirement lottery?

According to a new survey by investment firm Wells Fargo & Co., middle class Americans are woefully behind on saving for retirement. The approach is so lax that a Wells Fargo representative described it as essentially waiting for a miraculous event, like winning a lottery, to bail out retirement funding.

The important thing to remember about lotteries is that the vast majority of people who enter them never win. You're going to need a better plan for your retirement.

Disturbing commentary on savings rates

The Wells Fargo survey underscores the simple truth that on average, people's savings accounts and savings rates for retirement just are not adequate enough to fund their retirement plans.

The survey found that middle class Americans think they need $300,000 to fund their retirements, but on average have saved only $20,000 for retirement. Even survey respondents in the 50 to 59 age group had saved an average of only $29,000.

It's disturbing enough that people are so far behind in funding their retirement. What makes the result of this survey even more disturbing is that $300,000 sounds like an awfully low target to fund a middle-class income throughout retirement.

Taking action

Here are things you can do to get your retirement savings on track:

  • Use a retirement calculator to set retirement targets. Don't guess. Use a retirement calculator to figure out how much money you will need in retirement, and how much you'll need to save each year to reach that target. In fact, since retirement calculators use different methodologies, you might want to try two or three and average the results.
  • Adjust your savings rates to market realities. Retirement calculators will generally ask you to enter an assumed investment return. With the stock market shaky, bond yields low, and interest rates on savings accounts even lower, in order to be realistic you should enter a pretty modest assumed rate of return. It's your personal savings rates, not market returns, that will have to do the heavy lifting toward building your retirement fund.
  • Don't beg, borrow, or steal money from your retirement savings. A common, terrible mistake people make is that as they see their retirement nest egg start to build in size, they assume it is okay to let other priorities take precedence. After all, the thinking goes, that money won't be needed for years, so it won't hurt to hold off contributing for a year, or even borrow against the retirement fund, to pay for some immediate purchase. This is how people fall behind in retirement saving. You have to view your nest egg as 100 percent off limits, and that includes not straying from the savings rates you've calculated are necessary to meet your retirement target.
  • Check your assumptions and progress every year. One of the challenges of retirement planning is that there are so many variables. You need to recheck your assumptions every year, measure your progress towards your target, and reset your savings rates to make sure you are on track.

Face it: the chances are always going to be stacked heavily against you winning any kind of lottery. Fortunately, with retirement savings, you can take steps to rely on yourself rather than on luck.

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