I recently read a great article by Doug Short, longtime friend of the Fool, in which he pointed out that many people -- too many -- are failing to fully understand and deal with what he sees as a seismic cultural shift around retirement.

I think he's on to something. Among other things, Doug notes:

  • People are living longer, thanks to health-care innovations.
  • Tight-knit extended families are no longer the social norm, so older folks can't count on being supported by their descendants.
  • The increased obligations caused by the above -- what Doug calls "longevity risk" -- are being transferred to individuals,as 401(k)s and IRAs and the like increasingly supplant defined benefit plans and Social Security.

Doug calls this a "social experiment of staggering proportions." Why? Because too many people aren't doing their part.

Are you one of them?

Are you preparing to fail?
I feel that IRAs and defined contribution plans like 401(k)s and 403(b)s are among the best wealth-building tools ever devised. Here's why: Used properly, they make it possible for ordinary working stiffs to retire as multimillionaires, with very little sacrifice along the way.

The key phrase there, though, is "used properly." There are a lot of ways to screw this up. Consider:

  • To benefit, you must participate. Some statistics always amaze me, and one is that at many companies, participation rates are terrible. Sometimes, there are obvious reasons -- Starbucks (NASDAQ:SBUX), Convergys (NYSE:CVG), and Yum! Brands (NYSE:YUM), for instance, all have low participation rates, according to 401(k) tracker Brightscope. And that's not surprising -- Starbucks stores, Convergys's call centers, and Yum's KFC and Taco Bell locations all employ lots of lower-wage part-timers and young folks, and they tend not to be avid retirement savers. If that describes you, be the exception to the rule: Starting early pays off big.
  • Participation alone isn't enough. Even at companies such as Walgreen (NYSE:WAG), Exxon Mobil (NYSE:XOM), and XTO Energy (NYSE:XTO), all of which have 100% participation rates according to Brightscope, just being signed up isn't enough. If your employer has an auto-enrollment policy, odds are that you'll default to either a lifecycle fund or a money market fund -- and either way, there are almost certainly better options. Find them.
  • Don't forget your IRA. Lots of people pay lip service to the idea of an IRA but don't take any action. That's a mistake. An IRA is an extremely valuable tool, not least because of the freedom it offers. Unlike a 401(k), you're not stuck with a menu of investment options -- in fact, an IRA lets you work around weaknesses in your employer's investment menu. You can make direct investments in great stocks and, with luck, achieve superior returns over time. If you can afford to contribute the maximum to your IRA every year, do -- the extra contributions (and outsized returns available from the best stocks) can make a huge difference to your overall results over time.
  • Prioritize your other savings goals. Over the years I've heard a number of people say something like, "I'm saving for my kids' college fund now. I'll save for retirement later." Saving for college is a good thing, but it should come after you max out your retirement contributions. Why? Simple: You can get loans for college. Retirement? Not so much.
  • Don't get too conservative or too aggressive. After the volatility of the past year, the temptation to stick your remaining retirement savings in a money market fund and leave it there is understandable. Understandable, but not good -- if you're more than five to seven years from retirement, you need the returns and compounding power that stocks can provide. At the same time, it's possible to be too aggressive. At many companies, including Coca-Cola (NYSE:KO), employees have huge amounts of their 401(k)s invested in company stock. More generally, I have heard of a few people in their mid-60s postponing retirement for a year or two while they make some extremely aggressive investments to "make up lost ground." Does taking a lot of risk with money you're going to need in a couple of years sound like a good plan to you? Me, neither.

What are some of the other ways you've seen others mess up the seemingly simple act of saving for retirement? Scroll down to leave a comment and let me know.

Whether you're just starting out or nearing the end of your career, investing the right way is essential for the success of your overall retirement strategy. For advice on how to put together the best retirement portfolio for you, and access to a great members-only discussion community focused on retirement issues, take a 30-day free trial of the Fool's Rule Your Retirement newsletter service.

Fool contributor John Rosevear has no position in the companies mentioned. Starbucks is a Motley Fool Stock Advisor recommendation. Coca-Cola is a Motley Fool Inside Value recommendation and a Motley Fool Income Investor selection. The Fool owns shares of Starbucks and XTO Energy. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.