Facing the reality of retirement

If you've spent your career at a large company that nudges you repeatedly to make the most out of your 401(k), you probably will retire someday with plenty of money.

But if you are like most Americans, and work for companies that are less paternalistic, you probably are fending for yourself and failing to save enough. By the time you retire, there's a good chance that you won't have the money you need for golf greens fees, trips to see your family, or even an evening at Denny's. In fact, you might even wonder how you will pay the cable and electric bills.

According to a national study of large company 401(k) plans by benefits firm Aon Hewitt, only about 15 percent of employees are on track to have enough savings to retire in their usual lifestyle. They work for large companies that help employees get there by providing matching money and getting people to make contributions regularly.

To have enough money for retirement, Aon Hewitt says, people will need savings on their retirement day that are 11 times their old annual pay.

With that level of savings, the researchers say, each year of retirement people can replace 85 percent of the pay a person was used to receiving annually when working. This assumes an average lifetime to age 87 for men and 88 for women.

Besides savings from 401(k) plans, the researchers assumed people would also receive Social Security. So Aon Hewitt figures the average retirement will require your savings and Social Security to provide 15.9 times your last year on the job. The calculations were based on methodology from the 1981 President's Commission on Pension Policy and the Aon/Georgia State University Replacement Ratio study.

People preparing to replace 85 percent of their pre-retirement annual income per year would get 29 percent of their living expenses from Social Security and 56 percent from savings.

Studies have shown that most people underestimate what they will need for retirement, and also what they need to save. While income can be a deterrent to saving, more often than not people simply under-save because they don't realize what they need, or they procrastinate.

The most recent Aon Hewitt study provided evidence once again. When employers don't require employees to sign up for 401(k) contributions, and instead simply enroll the employee automatically, employees often do not miss the money that's regularly removed from their pay and routed into retirement savings. They can often save more than they might have thought possible. According to the study, people should be saving 9 percent of their pay each year for 40 years.

The researchers suggest that if more employers would enroll employees automatically in 401(k) plans, 15 percent more people would be on track to have an adequate retirement income. Results would be even better, according to the study, if employers did even more.

The researchers say that, too often, employers transfer just 3 percent of an employee's pay automatically into the 401(k). Yet 6 percent would be preferable. Even more is required if companies don't provide matching 401(k) contributions.

In addition, as the years go by, employers should be tweaking the contributions for each employee higher so that a portion of each raise flows automatically into the person's 401(k) account.

The Aon Hewitt researchers said employers should educate employees on how to invest and should discourage people from taking loans and withdrawing money before retirement. Employers also need to provide mutual funds and administration that is not overly expensive.

Although most 401(k) participants do not realize it, they are charged for participating in 401(k) plans.

And the fees can be so significant they reduce a couple's lifetime retirement savings by 30 percent, according to a recent study by think tank Demos.