Are you average?

Come on, admit it -- not a chance, right? Not in your own mind, at least. Garrison Keillor's fictional Lake Wobegon, "where all the children are above average," speaks to the way many of us view the world. It's human nature to think of ourselves as just a little bit smarter, stronger, faster, and of course, more devilishly attractive than the average person.

Except, apparently, when it comes to retirement.

Insurance giant Allstate has conducted a Retirement Reality Check annually for the past six years. The survey measures Americans' attitudes toward, and savings for, retirement. In the 2006 version, respondents were asked, "If saving for retirement were like driving on the highway, where would you be?"

The answers?
By far, the majority -- 48% -- said they are "in the middle lane, keeping up." More confidence was shown by 20%, who said they are "in the fast lane, passing others." And everyone else was rather timid. "On the on ramp, still getting started" came in at 14%; "in the slow lane, watching others go by," notched 13%; and "lost and looking for a map" held strong at 5% (yikes).

Obviously, retirement is one area where many of us are perfectly content thinking of ourselves as average -- regardless of age, gender, education, income, or geography. So what does an "average" retiree look like?

Scary in the center
Unfortunately, it appears that the answer is: Worse than you think. Only 21% of respondents to the survey (and only one-quarter of baby boomers) believe they are "very prepared" for retirement. Compare this to the 38% who expect their retirement to be "financially difficult." That's more than one-third!

Even scarier: Six percent of respondents aren't saving anything for retirement at all. Thirty-four percent say they're saving, "but not seriously." And perhaps the most frightening number in the study: 29% of baby boomers -- whose retirement en masse is imminent -- say they aren't saving seriously for their post-employment years at all.

Being "in the middle lane, keeping up" might make you feel like part of the in crowd, but it might not be enough to keep you fed, clothed, and sheltered after you leave the workforce. Put plainly, average isn't going to cut it.

What to do?
We all know the retirement picture is changing. The days of lifetime pensions are ending, and Social Security's demise may not be far behind. Even if it does survive, it will almost certainly not be enough to rely on as a single source of income. If you want financial stability in your twilight years, it's up to you to get there.

So what does it take? Some quick numbers: Let's say you're retiring in 30 years, and you want to live off the equivalent of $50,000 a year in today's dollars. By then, that $50,000 will need to be $150,000 thanks to inflation, and if that amount is 4% of your savings (the guideline espoused by the Fool's Rule Your Retirement service), your total retirement kitty will have to total $3.75 million.

Needless to say, "saving for retirement, but not seriously" is not the way to amass $3.75 million.

So what is the right way?
It sounds like an impossible task, but I promise you: It isn't. It just takes a little math and a little planning. And it's never too late (or too early, for you Gen Y-ers out there) to get started.

The first two things you should do are contribute to your company's 401(k) plan (assuming it offers one) and fund an IRA.

That's because at The Motley Fool, we believe the stock market is the best wealth-creator around. The market's historical rate of return is 10% per year.

Yeah, yeah, it's that easy, eh?
Index funds are one easy option for your 401(k) or IRA. The SPDRs (AMEX:SPY) exchange-traded fund tracks the S&P 500 and dings you just 0.10% in expenses. So rather than trying to beat the market, you can buy the market!

However, Fool retirement guru Robert Brokamp has called dividend-paying stocks the right stocks for retirement. Dividend payers are ideal because:

  1. For buy-and-hold types, the long-term power of dividend reinvestment can work wonders in your portfolio (particularly if held for long periods in a Roth IRA).
  2. For retirees or near-retirees, these stocks actually pay you in cash (much like a bond would) -- and because of that, you don't need to sell them to realize your profits.

What characteristics should you look for in dividend stocks? Well, for starters, an above-average (there's that word again) dividend yield. But you also want an organization securing a foundation for the long term, one that's shown a commitment to shareholders. Here are a few examples (not outright recommendations):


Dividend yield

Corporate governance rank*

General Mills (NYSE:GIS)



Wells Fargo (NYSE:WFC)



UnionBanCal (NYSE:UB)



Freddie Mac (NYSE:FRE)






*Data from Business Ethics.

The companies in the above table all sport dividend yields better than the market's 1.8% average, and they're recognized as good corporate citizens, which means they're focused on serving customers and shareholders and are focused on the long term.

From point A to point B
The retirement of your dreams is out there, but being average isn't going to bring it to you. If you'd like some help finding strategies that will, try Robert Brokamp's Motley Fool Rule Your Retirement service. You'll get 30 days of free access to all the service has to offer, including a crash course in the newsletter's philosophy, the "eight steps to ruling your retirement," discussion boards, interviews, and scores of tips and tools to help keep you on track. Click here to learn more about the free trial offer.

Ellen Bowman never ceases to be amazed by compound interest. She does not own any stocks mentioned in this story. The Fool's disclosure policy is pretty sure it's been a quiet week in Lake Wobegon.