New study, same conclusion: Retirement outlook looks bleak

by Center for Personal Finance editors

BOSTON (6/12/06)--The news isn't good for retiring baby boomers and Generation Xers, but there ishope: Saving more and working longer may substantially improve the outlook (Center for Retirement Research June 6).

A new study released last week by the Center for Retirement Research (CRR) at Boston College revealed that 43% of all households are at risk of not having sufficient funds to maintain their pre-retirement standard of living in retirement.

Those most vulnerable are younger households as well as those with low incomes or no pensions. The culprits include a sharp decline in traditional pensions, low 401(k) balances, low savings rates, and longer life spans.

The report concluded that minor adjustments can have major benefits. Even working two extra years or saving an additional 3% can substantially improve retirement security, according to CRR staff.

There's concern, though, that CRR's estimates are understated. Many people retire before 65, and there's no way to know how health care costs will affect retirees' standards of living (USA Today June 7).

Know how you could be at risk:

Most people need between 65% and 85% of their pre-retirement income to be secure. You may need more, depending on how you will spend your time. Try to generate accurate estimates.

It's no longer a good idea to count on Social Security replacing 42% of the average worker's earnings. Net Social Security replacement rates will drop to 30% by 2030, adjusting for the increasing Normal Retirement Age, taxation of benefits, and higher Medicare premiums.

Traditional defined benefit plans are going the way of the dinosaur. In 2003, only 10% of all private sector workers with pensions were covered solely by a defined benefit plan.

Consider increasing your 401(k) contributions. By boosting their savings rate just 3%, the proportion of Gen Xers missing their retirement income target by 10% or more drops to 38% from 49% (MarketWatch.com June 6).

Slightly more than half (53%) of the lowest earners (median income of $25,000) are at risk of inadequate retirement income. That compares with 40% of middle earners (median income of $56,000) and 36% of high earners (median income of $117,000).

Your chances of having a secure retirement increase the longer you work--for example, working to age 67 and not drawing income from Social Security or 401(k)s.

For more information, read "Pension Participants: Expand Retirement Savings for Future Security" in the Home & Family Finance Resource Center money savvy section.