Our Retirement Savings: Good News and Bad News

I'd love to write an article one day reporting nothing but good news about Americans and how well they're saving for retirement. This isn't that day. Our friends at the American Savings Education Council recently released survey results that offer reasons to both cheer and despair.

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First, the good news: Around half of the survey's respondents are making progress with their retirement savings. More specifically, some 57% say they're saving enough to lead to a "desirable standard of living" in retirement. Great, eh?

Now the bad news:

• More than one-quarter of respondents report saving at least 10% of their income. But to me, that's really a minimum savings guideline, leaving a big group of people saving less than they should.
• More than two-thirds claim to have ample funds in an emergency account to cover unexpected expenses such as "car repairs or a doctor visit." That's good ... but it means that one-third of families don't have such an emergency plan. And may I point out that having enough for a car repair or a doctor visit isn't really enough? Your emergency fund needs to be able to support you for several months, in case you lose your job or face massive medical expenses.
• Only 62% of Americans have a savings plan with detailed goals. And only half have a spending plan that's in line with their savings goals. This is a big red flag for our nation, because few of us are likely to reach comfortable retirements without a solid plan.

One way to save effectively is to put your savings on autopilot, by setting up automatic transfers into your savings account. Only 42% of Americans seem to be doing so. Another helpful tactic is to save at least part of tax refunds, gifts, bonuses, and other financial windfalls. Only 41% are doing so.

But it's not enough just to set up a savings account for your retirement. Automatic transfers work both with savings accounts and with other investments, such as mutual funds. Many funds let you make automatic transfers to buy fund shares. The long-term returns of stocks like ConAgra (NYSE: CAG), Staples (Nasdaq: SPLS), and Deere & Co. (NYSE: DE) have beaten the pants off savings accounts, many of which pay less than 1% interest. Mutual funds make it easy to invest in those and hundreds of other companies, all in a single investment. You can do that, right?

Get motivated
If the prospect of a dismal retirement isn't enough to get you doing what you need to do, here's another motivator: compounding. The folks at Wachovia found that many Americans end up inspired to save and invest once they learn more about how compounding works.

Below is a table showing how $100,000 will grow over 25 years, at the market's historical average annual growth rate of 10% per year:

Age	Nest egg
40	$100,000
50	$259,000
60	$673,000
65	$1,100,000

To see how compounding is really working, let's zero in on some of those first and last years:

Age	Nest Egg
41	$110,000
42	$121,000
43	$133,000
62	$814,000
63	$895,000
64	$985,000

You can see that between the ages of 40 and 41, your money grows by just $10,000. But in the single year between the ages of 64 and 65, you gain $115,000, which is more than your entire initial investment. When it comes to compounding, the more time that passes, the greater the gain. The sooner you start saving and investing in earnest, the better.