How Workers Blew Their Best Chance to Retire Rich

In the aftermath of the carnage from the tech bust of 2000-2002, a bumper sticker made its rounds in Silicon Valley: "Please God, just one more bubble." While it's clearly premature to term the last three years as a stock market bubble in the making, one thing is unquestionably true: Periods during which the entire stock market doubles in just a few years are exceedingly rare, and if you didn't take full advantage of the bull market move, you may well come to regret it.

Unfortunately, evidence suggests that while workers saving for retirement benefited from the surge in stocks over the past three years, they didn't get as much out of it as they arguably should have. Let's take a closer look at the numbers.

Yesterday, Fidelity provided its quarterly look at how the workers who have 401(k) retirement plan accounts with the financial giant have done. With more than 20,000 401(k) plans on its customer list covering almost 11.8 million participants, Fidelity's data provide a broad snapshot of the U.S. workforce.

Looking just at the headline figures, the news was good. Average 401(k) balances jumped 8% in the first quarter of 2012, rising to $74,600. Fidelity pointed to the stock market's big first-quarter gains as the primary driver behind the advance, but it also cited participant contributions and employer matching and profit-sharing contributions as another significant reason that balances pushed higher.

Longer-term, the picture looks even rosier. In the past three years since the stock market's bottom in March 2009, 401(k) balances have risen by 62%. The average balance back then was $46,200, pointing to a $31,400 advance during the period. Moreover, balances have been above their 2007 levels for some time, demonstrating the much-needed growth that retirement savers all seek over time.

Fidelity trumpets the positives in the report, showing how increasing balances indicate that workers are committed to retirement saving. Yet I don't think the data support that conclusion, and instead, they suggest that workers aren't doing nearly enough to ensure a solid retirement.

The clearest conclusion from the latest Fidelity results is that workers aren't taking nearly enough risk in their retirement portfolios. With retirement savings being the longest-term financial goal that most people have, 401(k) accounts should be the most aggressively invested part of most people's overall assets. But when the S&P 500 and Dow have more than doubled, a 62% increase shows that workers are allocating too little of their 401(k) accounts to stocks. Moreover, that doesn't even consider the impact that newly contributed money should have in boosting accounts even further. Fidelity said that its participants saved about 8% of their salaries, which suggests an even lower allocation to stocks.

The solution that workers need to consider isn't easy, but it's the best path to increased savings:

  • Boost your contributions. Given how far behind many workers are in saving for retirement, an 8% contribution won't let them make up ground. You can save up to $17,000 in a 401(k) this year, with an extra $5,500 if you're 50 or older.

  • Invest smarter. If you're nervous about the overall market, then you need money in an IRA so you can pick individual stocks. Low-volatility, high-yielding companies can give you more peace of mind than the S&P 500. Consistent demand for products like Lorillard's (NYS: LO) cigarettes and Merck's (NYS: MRK) medicines helps hold their shares relatively stable, and each pays a dividend well above the market average. Consumer-oriented stocks Campbell Soup (NYS: CPB) , PepsiCo (NYS: PEP) , and Kellogg (NYS: K) similarly tend to hold their own even in down markets, and they also have identified growth prospects in promising areas such as emerging markets due to their strong brand-name presence.

  • Get cheap. You don't always get many good investment choices in your 401(k) plan. But sticking with low-cost investment options can make a huge difference in the long run, as an extra half-percent in annual fees can cost you 10% or more of your nest egg by the time you reach retirement age.

It may be a long time before we see the stock market double in such a short time again, but that doesn't mean you can't retire successfully. It takes determination and discipline, but any number of Fool community members can assure you that it can be done. Don't you owe it to yourself to try?

For some more guidance, check out The Motley Fool's special report on retirement investing. You'll find some useful general investing tips as well as three promising stock names that fit well for many retirement investors. Getting access couldn't be easier: Just click here to get your free report today!

At the time thisarticle was published Fool contributor Dan Caplinger does his best not to blow his chances. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in PepsiCo. 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 never stops working for you.

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