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Retirement savings: 4 tips for fixing the three-legged stool

March 28, 2011

| MoneyRates.com Senior Financial Analyst, CFA

A new study by the Center for Retirement Research at Boston College found that households relying on a 401(k) plan as their primary retirement plan face a significant income gap in retirement. This should prompt a fresh look at what has long been referred to as the "three-legged stool" of retirement funding--Social Security, employer retirement plans, and private savings.

According to the study, the average household relying on a 401(k) plan as their sole employer-sponsored retirement vehicle is projected to come up well short of their retirement income target. The study projects an annual income gap of $30,392 on a target of $74,545--a shortfall of more than 40 percent.

What can you do to address this problem? Here are four suggestions:

  1. Don't confuse personal savings with 401(k) contributions. 401(k) and similar defined contribution plans put the primary burden for retirement savings on the employee. What you have to recognize is that even as you diligently contribute to your 401(k) plan, you are likely to need additional savings to fund your retirement.
  2. Ramp up savings to make up for lower returns. The math is ugly, but undeniable. After a dozen years of disappointing stock returns, and with interest rates on money market accounts and savings accounts now near zero, you simply have to put aside more money to accumulate retirement savings.
  3. Fully segregate retirement money from other savings. Use separate savings accounts or money market accounts for money you may need to access for emergencies, so you don't blur the line between short-term and long-term savings.
  4. Do retirement income projections early and often. Projecting income in retirement is a tricky business involving several variables. Don't assume you are on track just because you are sticking to a plan you set a few years ago. Revisit your assumptions regularly so you can adjust to the unexpected, and the sooner you start doing this, the more time you'll have to get back on target.

It's widely known that Social Security funding is not on completely solid ground. The scary thing is that for many families, this is the most secure leg of the three-legged retirement stool.

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