Why You Won't Be Able to Retire

Millions of Americans have dreams of spending their golden years playing shuffleboard while sailing off into the sunset on a Caribbean-bound cruise ship. Unfortunately, for many of these folks, their retirement reality is likely to be closer to having to eat cat food to survive. There is a true crisis ahead -- and new data shows just how unprepared most Americans are to retire.

Danger ahead
Last week, the Center for Retirement Research at Boston College updated its National Retirement Risk Index. This index measures American households' financial assets, as well as changes in housing and Social Security payments, to assess how ready the average household is to retire.

Perhaps not unsurprisingly, the most recent reading shows that 51% of Americans will not be ready to retire at age 65, up from 44% in 2007. Frighteningly enough, that figure doesn't even take into account health-care or long-term care costs. When those costs are included, the percentage of Americans who aren't ready to retire jumps to 70%!

While it's not news that our country is giving short shrift to our collective retirement savings, the magnitude of that gap is somewhat alarming. If these figures are even somewhat accurate, there are going to be a lot of us working well into our 60s, 70s, and beyond! Even the younger generation hasn't escaped this bleak scenario -- the same Retirement Risk Index shows that 56% of Generation X households are at risk of failing to meet their retirement needs. But you don't have to be a statistic. You can beat the retirement odds.

Ratcheting up savings
Unfortunately, it's pretty much guaranteed that medical, housing, or daily living costs will only be more expensive in the future. That means the one of the few variables we can reasonably affect is the input, or savings. No one wants to hear that they need to save more, especially given that so many workers are facing unemployment or salary reductions.

But the truth is that despite the numerous other expenses of daily life, retirement saving should still be a high priority, no matter what your age. Saving for a house or paying for your child's college education should not come at the expense of saving for retirement. Times may be tough, but to fully harness the magic of compounding, you need lots of time to allow your money to grow, so get saving!

And since contributions made to qualified retirement plans like a 401(k) or IRA are tax deductible, you're automatically lowering your tax bill right away by kicking in to these plans. Plus, your money grows tax-deferred until you make withdrawals in retirement, so you get even more of a leg up on putting compounding to work for you.

Don't give Uncle Sam one penny more of your hard-earned money than you absolutely have to. Make sure you are contributing to a retirement plan early, consistently, and as fully as possible.

Stock up for retirement
While saving is perhaps the biggest part of the retirement equation, the second most important part is how you invest that money. One of the biggest mistakes you can make right now is to cut back on your equity exposure. In wake of the recent financial disaster, many investors are hightailing it into the perceived safety of bond funds. While such a move is understandable, it could end up derailing your retirement dreams.

Investors typically need a much higher equity exposure than they think they need. Stocks are the key to generating higher long-term returns, so even retirees need a hefty dose of equities to keep their portfolios growing throughout their retirement. While investors in their 20s and 30s might want to aim for 90%-100% in stocks, I believe that even folks in retirement should aim for an equity allocation as high as 55%-65%.

Of course, what kind of stocks you buy can also have an effect on the future size of your retirement portfolio. If you want to get a little extra boost from income payments from your equity holdings, consider looking at high dividend-paying stocks. While dividend payments have been a casualty of the financial crisis for many companies, some firms still offer a reasonable payout. Now, you don't want to overpay for dividends, so stick to relatively inexpensive dividend stocks with a reasonable price-to-earnings ratio. Check out the following stocks that measure up fairly well on both fronts:

Source: Yahoo! Finance.

Or if individual stock picking isn't your thing, you could just invest in a high-quality mutual fund like Vanguard Dividend Growth (VDIGX) that buys dozens of like-minded dividend-paying stocks.

The road to retirement will be a tough one for most Americans, and the road after reaching that goal may be even tougher. But if you act now and remain committed to your retirement program along the way, you can be one of the lucky few who reaches the retirement goal line prepared and in control.