retirement

Retirement savings picture improves a tad

Where are things going wrong?

The numbers are daunting, but getting to retirement requires putting a pen to paper, or using an online calculator such as Bankrate's, to determine how much retirement will cost.

"Many people have 'lump sum' illusion -- they think they can live 40 years on a 401(k) account amounting to $100,000, and they simply don't realize what the risks are of a very long lifetime, not to mention health care cost risk," says Olivia Mitchell, who wears several hats as professor at the Wharton School of Business at the University of Pennsylvania, executive director of the Pension Research Council and director of the Boettner Center for Pensions and Retirement Research.

In addition to harboring vague illusions of what it will take to retire, people seem to suffer a disconnect between what they know they need to do and what they actually do.

"There is no magic bullet to saving for retirement other than living on less and saving more," says Elliott Orsillo, CFA, co-founder of Season Investments in Colorado Springs, Colo.

And that means budgeting and controlling spending in addition to prioritizing retirement savings.

"A good starting goal would be to save 10 percent of one's income for retirement with the goal of increasing that percentage slowly over time," Orsillo says.

Boosting retirement contributions 1 percent or 2 percent every year is generally painless. Some employer-sponsored plans offer automatic contribution increases every year for people who prefer a set-it-and-forget-it arrangement. But for workers whose retirement plans lack this feature, it's not a huge ordeal to make an annual adjustment.

Working longer will be the norm

As so many Americans are so far behind in their savings, the new reality of retirement will likely require working longer. Beyond a certain age, simply saving more and investing better than Warren Buffett won't cut it.

The only alternative is to pour more money into retirement savings by working an extra five or 10 years, according to research by Webb and other economists at the Center for Retirement Research.

Easier said than done, but it works because, "It has a drastic effect on the amount of Social Security benefits that a household can get," says Webb.

"Now the second reason it works, when you get to 70, you have a shorter remaining life expectancy. You can draw down your assets more rapidly. The third reason it works is that you have another eight years to make contributions to your 401(k) and earn investment returns," he says.

It's never too late to start saving, but it's never too early, either. Boosting retirement contributions by just a little every year can vastly improve retirement prospects. Workers can either take a hit early in life by saving a larger proportion of their income or tack on a few more years at the end of a career. The latter option works well if they really love their jobs and they can manage to hang on.

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