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The sluggish economy may have you feeling poorer than ever. But at least by one measure, the recovery since the financial crisis began almost three years ago has been a lot stronger than most people think.

A combination of a rising stock market and a new sense of frugality have given a big boost to the nation's retirement nest eggs. But the way people are investing their retirement money suggests that they could do even better by adopting some simple changes to their investment strategies.

Getting ready for retirement
The Investment Company Institute reported last week that total retirement assets jumped to $18.1 trillion as of the end of March, representing a rise of almost 10% from the first quarter of 2010. The numbers are just a bit less than the record level set during the third quarter of 2007, which corresponds to the stock market's record highs. Given the big jump in stocks since early 2009, it makes sense that retirement account balances are on the rise in a big way.

But wannabe retirees aren't just watching the market lift their nest eggs higher. According to the ICI, households have 37% of their assets set aside for retirement, up from just 27% 20 years ago. And interestingly, retirement savers appear to be using all the tools available to them, with roughly equal amounts held in IRAs, 401(k)s and other defined contribution plans, and government pension plans. Private pensions and annuities also play a vital role.

How people invest
Predominantly, retirement savers are still using mutual funds to build their various nest eggs. Within IRAs, mutual fund investments accounted for 47% of total assets. The corresponding figure for 401(k) and other defined contribution accounts was even higher, at 55%.

Obviously, that's good for the many companies that manage mutual funds, including AllianceBernstein (NYSE: AB  ) and SEI Investments (Nasdaq: SEIC  ) . But it's also unfortunate, in that investors are choosing higher-cost ways to invest even when they don't have to.

Freedom of choice
It's hard to criticize 401(k) investors for using mutual funds. Typically, many employers don't give their workers much choice in selecting investments for their retirement accounts at work, so mutual funds may be all you have to choose from.

IRAs, on the other hand, give you a much wider range of investment choices. By choosing whichever IRA provider you wish, you can buy individual stocks, exchange-traded funds, and many other types of investments as well as mutual funds. Yet many settle for higher-cost actively managed mutual funds; out of about $2.3 trillion held in mutual fund IRA accounts, just a pittance -- $163 billion -- went into low-cost index funds.

The better move
It's never been more important for retirement savers to keep close tabs on their investments. Especially for those getting close to retirement age, turning a healthy nest egg into steady income can be tough. Various investments promise steady income, but with low rates, it can take a lot of capital to generate a small amount of investment income to supplement your Social Security and other income.

Rather than giving yourself a false sense of security, you should look closely at your anticipated income needs in retirement and craft a financial plan that will meet them. In particular, dividend stocks look quite attractive. Dozens of stocks, including Chevron (NYSE: CVX  ) , AT&T (NYSE: T  ) , and Intel (Nasdaq: INTC  ) , offer dividend yields of 3% or more while sporting very reasonable earnings multiples around 10.

If you prefer to go the fund route, low-cost ETFs can help you get on the dividend bandwagon. Vanguard Dividend Appreciation (NYSE: VIG  ) and SPDR S&P Dividend (NYSE: SDY  ) are just two of the ways to get a big helping of dividend stocks for your portfolio -- all while keeping fund fees under control.

Take control today
It's good to see retirement balances on the rise, but you still need to defend your finances from fee-hungry financial companies with an eye toward their own profits. By taking control of your IRA money and the other retirement assets you have autonomy over, you can give yourself the best chance to succeed in the long run.

To find a nice sample of 13 smart stocks that pay dividends, take a look at the Fool's special report on dividend stocks. Get your free copy today by clicking here.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Fool contributor Dan Caplinger goes as far as he can. He owns shares of Vanguard Dividend Appreciation. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of SEI Investments, Intel, Chevron, and AT&T, as well as creating a diagonal call position in Intel. 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 keeps going and going and going ...

Read/Post Comments (2) | Recommend This Article (8)

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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 July 09, 2011, at 11:04 AM, rumicro wrote:

    Good advice. How does one with over 30 years of IRA's, Roth IRA's and personal funds under management by a "financial advisor company' move to the self directed investments? The fees have definitely eaten up significant portion of the fruit even during the periods when the crop was a bunch of rotten fruits.

  • Report this Comment On July 10, 2011, at 8:52 PM, TMFGalagan wrote:

    @rumicro - In many cases, it's just a matter of finding the right alternative, and then authorizing the company that manages that alternative to go to your financial advisor and arrange to move your money. Yes, some of those advisors will try to take one last swipe at your money through termination or surrender fees, but you may be able to avoid them if you're careful with how you take action.

    good luck,

    dan (TMF Galagan)

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