Give Your Future Self a Raise

We've all heard the "10%" rule of thumb -- you know, the one that says if you save 10% of your paycheck, you'll be in good shape by the time you retire.

Too bad it's not true.

What's missing from the 10% chestnut is this vital footnote: "As long as you start by age 25 and never stop saving 10% of every dollar you earn until age 65." Most of us won't do that. Instead we buy our homes and cars and put the kids through school, and then -- after a few vacations, home renovations, and transmission overhauls -- we finally get serious about saving for the future.

And what are we left with? Enough to cover about 11% of what our future self will need in retirement.

The 89% shortfall

Yes, according to the Employee Benefits Research Institute, the average American at retirement age today covers just 11% of his or her basic living needs from personal savings. So where does the rest come from? Filling in the gaps of the 89% shortfall are checks from Social Security (41%), defined-benefit pension plans (24%), and part-time work (24%).

That brings the average yearly "salary" of median-income retirees to $34,000 -- a figure that takes the shine right out of the golden years. If Social Security lowers its payout, or if pension plans continue to get cut back, your retirement take-home dollars may not even amount to that much. So much for that lavish Italian retirement villa, eh?

A recent study in the Journal of Financial Planning revealed that a 45-year-old will have to sock away twice as much as a 25-year-old to enjoy the same lifestyle in retirement. Wait until age 55, and you're looking at some major belt-tightening -- you'll have to save three times as much per paycheck as the young whippersnapper in the next cubicle. Oof.

Don't let your passport lapse just yet. Here's how to play catch-up. Buckle up!

Turn it around -- starting today

You don't have to scale back to ramen noodles and take in renters to turn your future around. Want the cheat sheet for playing retirement catch-up? Here it is:

Save more. Work longer.

End of story.

Sounds dull, but if you get serious about those two things -- work an extra two years and sock away just 3% more in savings if you can -- you will turn your entire financial future around.

Two ways to reverse the hurt

If toiling away in a dark cubicle for years to come isn't your style, consider a few moves that will make you a smarter and faster saver.

1. Eke out more money from your boss. Contributing to employer-sponsored 401(k) and 403(b) plans is a great no-brainer way to save. The money is automatically taken out of your paycheck, and your taxable income is lowered -- meaning you won't miss the money as much as you think you will. Even better: If your employer offers any match on the money you save, that's an instant savings boost. A 25% match (the equivalent of two-year market-beating returns just for showing up) turns your $5,000 contribution into $6,250. If you're 50 or older, take advantage of yet another break -- a tax break -- via the catch-up contingency, which lets you sock away as much as $20,500 in pre-tax dollars in 2007.

2. Let Mr. Market do some heavy lifting. Don't quit the stock market once you hang up your suit and tie. Give the money you don't need in the next five to ten years room to run without risking it all on highfliers. Consider this oft-overlooked footnote about the stock market's historical 10% annual return: 6% comes from capital appreciation and 4% from gains from dividends. Late savers can improve their lot with less risk by making investments that carry above-average dividend yields. (See the links below for dividend stocks ideas that can fuel your portfolio.)

Upping your savings and making your assets work a little harder can turn a so-so retirement plan into a stellar one. The sooner you get going, the sooner you'll be on the right track.

Dayana Yochim was no child savings prodigy, but she's made a valiant effort to overcome her youthful discretionary overspending. She dishes money tips and virtual cocktails for the Motley Fool Green Light service at www.GreenLight.Fool.com.