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Unless you want to work for the rest of your life, you know you need to save for retirement. After a disastrous period for retirement savers during the market meltdown two years ago, workers have gotten the message that when it comes to putting money aside for their golden years, they're on their own -- and it's up to them to make sure they build the nest egg they'll need to retire on their terms.

Comparing two groups
Yesterday, Fidelity Investments came out with its annual look at employer-sponsored 401(k) plan accounts. With more than 11 million employees participating in plans that Fidelity oversees, the investment company has a vast pool of data that it can use to analyze trends among workers saving for retirement.

In stark contrast to the situation during the bear market at the end of 2008, when 401(k) balances fell an average of 27%, the news from Fidelity was largely good this year. The average balance among 401(k) participants rose to $71,500, the highest level since Fidelity started tracking worker balances 10 years ago.

One lesson that Fidelity drew from the results was that consistently adding to your retirement plan at work paid dividends, even during the so-called lost decade for stocks. Among workers who stayed at the same employer and kept their 401(k) accounts open throughout the period, average balances more than tripled, from $59,100 in 2000 to $183,100 at the end of 2010.

Still further to go
Despite the good news, workers haven't managed to make a comfortable retirement a sure thing. Savers aged 60 to 64 had an average of $120,600 set aside for their retirement. But even that sizable sum doesn't come close to what most retirees will need in order to keep up their pre-retirement standard of living.

To make up the difference, you need to take a close look at your own retirement plan. Fidelity reported that on average, workers saved 8.2% of their salaries in their 401(k) plan. With limits of $16,500 for those under age 50 and $22,000 if you're 50 or older, most workers have plenty of room to increase their contributions beyond the 8.2% level.

In particular, it's essential to make sure you're not giving up an employer match, since it represents free money your employer is giving you as an incentive to save. Even though some employers cut back on matching contributions during the recession, Fidelity reports that only 8% of its plan sponsors made cuts -- and half of those have restored them. Ford (NYSE: F  ) , Weyerhaeuser (NYSE: WY  ) , and Micron Technology (Nasdaq: MU  ) are just a few of the many companies that have gone back to matching 401(k) contributions after suspending or reducing matches in the past three years.

Fill in the gaps
Unfortunately, many 401(k) plans are lacking when it comes to smart investment choices. If you suffer from a bad 401(k), follow this simple three-step plan:

  • Contribute at least enough to get a full match from your employer.
  • If your plan has at least one low-cost option, such as a stock index fund or ETF, then put all of your 401(k) money into that plan option.
  • That will leave your 401(k) undiversified, so you'll need to fill in gaps by investing outside your 401(k), either in an IRA or with a taxable account.

Often, the best of a bad 401(k) lot will be a simple large-cap U.S. stock fund. So that means that in an IRA or taxable account, you'll want to cover other asset classes. If you like ETFs, a combination of iShares Russell 2000 ETF (NYSE: IWM  ) , Vanguard Emerging Markets Stock (NYSE: VWO  ) , and Vanguard REIT Index (NYSE: VNQ  ) can round out the stock side of your portfolio. Add an array of fixed-income options, such as the iShares Aggregate Bond ETF and SPDR Barclays High-Yield Bond (NYSE: JNK  ) , and you'll have a well-balanced savings strategy that can get you to retirement a lot more safely than a 401(k) alone.

Save smarter
Your 401(k) plan is a critical part of your overall retirement savings strategy. But it doesn't have to be the only part. With the right combination of investments at your disposal, you can get yourself a lot closer to having the retirement you've always wanted.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger thinks the IRS should come up with a catchier name for 401(k)s. He owns shares of iShares Russell 2000 and the Vanguard Emerging Markets and REIT ETFs. Ford Motor is a Motley Fool Stock Advisor pick. Motley Fool Alpha has opened a short position on iShares Russell 2000 Index. The Fool owns shares of Vanguard Emerging Markets Stock ETF. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always makes the smart moves.


Read/Post Comments (9) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2011, at 5:30 PM, ilong wrote:

    The main reason I lowered my 401k contribution was because I was unhappy with the investment offerings. I am now investing outside of my 401k to try and save something for retirement with my 401k being secondary. I think I can make more with the fool funds than my 401k can make.

  • Report this Comment On February 24, 2011, at 5:38 PM, xetn wrote:

    Given the Fed's inflating the currency, you will probably be lucky to have a retirement worth anything. For example, $1 million in 1980 would require $2,672,609.22 in today's dollars!

    That calculation is via the Fed's own "cpi inflation calculator" available : http://data.bls.gov/cgi-bin/cpicalc.pl. Since the government tends to grossly understate the level of inflation in the economy, you can bet that that figure above is "optimistic".

  • Report this Comment On February 24, 2011, at 6:21 PM, gkirkmf wrote:

    It is entirely possible that Fidelity's statistics are somewhat off. There are a lot of people with more that one 401K going (changing employers) and even more who roll their 401k's into rollover IRAs along the way... ( I am guilty of both over the years). This would bring down the "average" 401K account amount quite a bit I suspect, while not reflecting the total of an individual's retirement savings.

    I whole heartedly agree with ilong's comment on fund offerings in some plans. I was fortunate that my last employer allowed employees to put their entire 401k in a self managed account.

  • Report this Comment On February 25, 2011, at 10:24 AM, PeyDaFool wrote:

    gkirkmf,

    You're right. I use Fidelity to fulfill partial retirement needs, but I also have accounts with Vanguard, Sharebuilder and a pension fund with the state of Washington. Fidelity is only tracking 20% or so of my investments. For them to make a statistic based on what is in those accounts could be considered misleading.

  • Report this Comment On February 25, 2011, at 12:02 PM, mikecart1 wrote:

    I keep a monitor of my 401K and keep contributions pretty high (over 10%). I have been able to generate around 9% annual returns overall the past 5 years - even with recession. You just gotta know how to invest in the 401K.

    401K is like playing as a sniper in a FPS

    Regular Broker is like playing as a AK47 shooter

    Roth IRA is like playing in an armored vehicle

    Being able to play in all setups is how you truly get rich! Excuses like "my 401K doesn't offer anything good" are lame. If you can't find a decent investment in your 401K which is usually out of 20 or fewer funds, then you shouldn't even be investing.

  • Report this Comment On February 25, 2011, at 12:23 PM, jmt587 wrote:

    I'd add a potential 4th step to your 3 step plan if you have a bad 401(k). Ask to become a member of your company's pension committee. You might be surprised. I asked at my last employer, and was on the committee within a month. I'm not thrilled with the choices at my current employer (been here a few weeks, there are a couple decent domestic choices, but I'd sure like more, and I'd like some good international choices), but I'll ask about that soon. Maybe they'll say no, but maybe they won't, and maybe we can make retirement offerings accross the country a bit more Foolish.

  • Report this Comment On February 25, 2011, at 12:28 PM, jmt587 wrote:

    I'd add a potential 4th step to your 3 step plan if you have a bad 401(k). Ask to become a member of your company's pension committee. You might be surprised. I asked at my last employer, and was on the committee within a month. I'm not thrilled with the choices at my current employer (been here a few weeks, there are a couple decent domestic choices, but I'd sure like more, and I'd like some good international choices), but I'll ask about that soon. Maybe they'll say no, but maybe they won't, and maybe we can make retirement offerings accross the country a bit more Foolish.

  • Report this Comment On February 25, 2011, at 2:23 PM, sept2749 wrote:

    I am a small sole business owner (sub-s corp) and don't have a 401k and couldn't afford to start up a plan - not worth it. That leaves me one or two choices - IRA -Sep or Roth. I have been using the SEP and have accumulated very little as the IRS only allows a deduction of 6000.- per year for those over 50. This is obviously not enough. Fortunately, I was able to put togather a fairly decent portfolio over the past 20 years and that's my retirement fund. Small Businessmen like myself always get the short end of the stick with health insurance and retirement accounts.

  • Report this Comment On February 25, 2011, at 4:20 PM, wolfman225 wrote:

    I'm just starting over after a divorce at age 47. Starting over from near zero, I have few options, if I hope to have any kind of a nest egg available for retirement by 67. As a result, I have decided on a rather aggressive program. After paying off all debt (other than my house, and I've got that rented) I have recently opened a new 401k. I am 100% in stocks; spread over small/mid-cap growth funds, large cap value, and 10% exposure to emerging markets. I've commited 20% pre-tax earnings to this account. I have also started a ROTH, using a dividend/value strategy similar to the Foolish Four (it's currently up 24.5%). I also have set aside 6 months expenses (appx $10K) in a cash account.

    If things go according to historical norms, I should have accumulated about $875K by the time I'm eligible for full retirement at age 67. If SS is still available, that will just be gravy. If it's not, I have real estate to fall back on that should backstop me nicely.

    I realize that the above sum won't buy nearly as much in 2032 as it will now, but it still beats a poke in the eye.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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