(MONEY Magazine) – What will it be? St. Thomas in January with daiquiris at the 19th hole and a pile of dividend checks waiting for you back home? Or a part-time job at the local mall, macaroni four nights out of seven and a stack of bills that will overwhelm your next Social Security check? Whether you'll wind up living the retirement of your dreams or of your nightmares depends on whether you head off the five threats that we identify in this article. Individually and in combination, these threats -- pension loss, health-care cutbacks, diminished Social Security benefits, inflation and your own improvidence -- can thwart your plans for a financially secure old age. Fortunately, however, there are steps you can take now to protect yourself from every one of these dangers. The trends behind the threats are powerful ones. Both government and employers have grown stingier with retirees in recent years. Following are just a few examples. -- Last August, Congress increased the portion of Social Security benefits subject to federal income tax from 50% to 85%. -- Since the mid-'80s, cost-conscious employers struggling to compete in the global economy have been dumping traditional pensions in favor of cheaper 401(k) plans, shifting the burden of saving for retirement to employees. -- Companies are trimming back or even eliminating medical benefits that they had once promised to retirees. In September, for instance, General Motors announced that in January it would start charging its 105,000 salaried retirees premiums for their health insurance. Adding to such worries are the recent headlines predicting that the federal Pension Benefit Guaranty Corporation (PBGC), which guarantees the payouts promised to 41 million workers, would go bust unless it's rescued by a taxpayer bailout that would make the savings and loan crisis look like a $2 teller error. Mercifully, this is one threat you shouldn't lose sleep over. True, the PBGC has a $2.7 billion deficit, but the agency will not have to come up with the cash all at once; pensioners, unlike bank depositors, cannot have all of their money on demand. Says PBGC director Martin Slate: "The situation is not comparable to the S&L crisis in nature or magnitude. The PBGC is in no immediate danger, but we now know that we have to deal with the problem before it becomes substantial." To that end, a federal task force was expected to recommend in late September that Congress force companies with underfunded pension plans to pay higher PBGC insurance premiums until they adequately fund their plans. None of this bad news would seem so ominous if Americans were serious savers. But they're not. Fully 35% of adults polled by the Employee Benefit Research Institute (EBRI) and the Gallup Organization last April said they hadn't yet started saving for retirement. And although Americans have traditionally saved a greater fraction of their incomes as they aged, there is so far little evidence that the baby boomers will follow suit. Clare Hushbeck, a senior analyst with the American Association of Retired Persons (AARP), concludes ominously: "Baby boomers are waiting to inherit the baby boodle from their parents, even though most can't expect to retire on inherited wealth." You can avoid that dreary prospect, however, by facing up to the five biggest threats and pursuing the strategies for avoiding them outlined below:

1 You will not receive an old-fashioned pension. For those lucky enough to get one, the monthly pension check can replace as much as a third of pre-retirement income. Nowadays 29% of retirees collect private pensions, compared with only 9% in 1962. But if current trends continue, the heyday of the traditional pension is past. Reason: the shunning, . by small companies in particular, of so-called defined-benefit plans in favor of less expensive and easier to administer defined-contribution plans like 401(k)s. The number of defined-benefit pension plans dropped 25% from 1983 to 1989, while the number of defined-contribution plans climbed 40%. Large corporations, on the other hand, are increasingly providing 401(k)s in addition to traditional pensions; the percentage of private-sector workers covered by two or more retirement plans doubled to 18% from 1975 to 1987. The bottom line, though, is that defined-contribution plans today serve as the primary employer-sponsored retirement plan for about a third of all participants, up from about a quarter a decade ago and rising. Under a defined-benefit pension plan, employees are guaranteed a fixed monthly payout for life and usually are not required to make any contributions of their own. By contrast, defined-contribution plans are funded primarily by employees, who also assume all investment risk. With a traditional pension plan, you can simply sit back and watch your employer's contributions to it grow into a rich source of retirement income. A defined-contribution plan, however, may never amount to much if you fail to contribute enough to it or if you mismanage your investments. In short, you become even more vulnerable to threat four (inflation) and threat five (your own shortcomings as a saver), discussed later in this article. The advice: Try to get a job at a big company that offers both a pension and a 401(k). If you cannot achieve that ideal, you'll need to increase your savings to make up for the loss of the money that a pension would have provided (see the profile above). Hewitt Associates, a Lincolnshire, Ill. benefits consulting firm, calculates that a 35-year-old earning $50,000 a year who can count on Social Security, a 401(k) and a pension needn't save a cent more to enjoy a worry-free retirement, assuming that he or she contributes 6% of pretax pay to the 401(k) and the employer kicks in 50 cents for each dollar. Take away the pension, however, and the employee must save an additional 9% of after-tax income to retire just as comfortably. Princeton University economics and business policy professor B. Douglas Bernheim offers these rough rules of thumb: If a married couple's primary wage earner will collect a pension, retirement savings -- including 401(k) accounts -- at age 65 should equal at least 2 1/2 to six times the final total pay of both spouses, with higher-paid households requiring bigger nest eggs because Social Security will replace less of their pre-retirement income. If the couple's primary wage earner won't receive a pension, retirement savings should equal at least four to eight times their combined final pay.

2 Your retiree medical benefits will be trimmed or canceled altogether. Until health-care reform ends this worry -- no sooner than 1997, according to the best accounts -- doctor, drug and hospital bills can wreck even the best- laid retirement plans. Employer-sponsored medical coverage is especially crucial for early retirees who are too young to qualify for Medicare, the government insurance program for those age 65 and older (see the profile on page 68). But company coverage is also valuable to retirees over age 65 because it covers most of the costs that Medicare doesn't. Today only a third of all retirees get low- or no-cost health insurance from their former employers, and that figure is getting sucked south. Employers are scaling back because starting this year the Financial Accounting Standards Board requires them to report the cost of future retiree health benefits on their balance sheets, thereby reducing reported profits. According to a survey of 2,400 corporations by the benefits consulting firm Foster Higgins, fewer than 1% have eliminated medical benefits for current retirees, but 7% have ended or plan to end benefits for future retirees, 30% have increased premiums for current retirees and 26% have hiked deductibles or co-payments for current retirees. Some who've suffered such cutbacks have sued former employers to reinstate promised benefits, but courts so far have ruled that employers have the right to change or even terminate such plans as long as documents that describe employee and retiree benefits make that position clear. The advice: Assume the worst. People who plan to retire soon but are over age 65 don't have it too bad. At worst, they'll have to buy a private Medigap policy (cost: $300 to $3,000 a year) if their employer eliminates its supplemental medical insurance plan. But if you are contemplating early retirement, make sure you can afford to buy health insurance on your own. Individual coverage currently costs between $3,500 and $12,000 a year, depending on your and your spouse's health. You may not have to wait until 65 to retire, however, even if you are not able to afford an individual policy. , Under the federal COBRA law, you are generally entitled to buy insurance at your or your spouse's former employer's group rate for 18 months. That may give you affordable coverage from age 63 1/2 until Medicare kicks in.

3 Your Social Security benefits will shrink. The contraction has already begun. The new tax law signed by President Clinton last August will increase the portion of your Social Security payments subject to federal income tax from 50% to 85% if your total income (including half your Social Security benefits) exceeds $44,000 for married couples and $34,000 for singles (see the profile at left). Also, the age at which you can collect full Social Security benefits, now 65, is already scheduled to rise to 66 in 2005 and to 67 in 2022. Experts expect these changes are just the beginning. Says Michael Carter, a senior vice president at the Hay Group benefits consulting firm in Washington, D.C.: "Congress will probably continue to nibble at Social Security benefits. The retirement age might be further advanced, all benefits may be taxed and cost-of-living adjustments may even be scaled back or frozen for a while." The advice: Face up to the fact that Congress is making the Social Security system even more progressive, meaning that lower-paid employees get the most out of it. For instance, Social Security now replaces 58% of lower-paid workers' wages but only 25% of higher-paid employees' salaries. That's why B. Douglas Bernheim estimates that a 35-year-old married couple earning $150,000 a year should save at least 11.7% of their after-tax income, compared with 4.6% for a couple earning $30,000.

4 Inflation will eat your savings. Even at a gentle 3% a year, inflation cuts the value of a traditional pension in half in 23 years. While Social Security benefits are (so far) adjusted for cost-of-living increases, most private pensions are not. Between 1984 and 1989, the latest period for which statistics are available, the U.S. Department of Labor reports that only 24% of all pension plans gave retirees one or more cost-of-living increases. Inflation can also stunt the growth of your retirement savings if you rely too much on fixed-income investments. From 1926 to 1992, the average annual rate of return on Treasury bills, for example, was 3.8%, compared with 3.2% for inflation. The advice: Don't be afraid to put at least part of your retirement savings into stocks. According to Ibbotson Associates, a Chicago investment consulting firm, the average rate of return for the S&P 500-stock index from 1926 to 1992 was a healthy 12.4%, well above the inflation rate. Yet a 1991 Bankers Trust survey of 201 401(k) plans revealed that when employers offered a guaranteed investment contract (GIC), which is similar to a bank certificate of deposit, employees put 47% of their new contributions into it. They put only 19% into stock funds. Certified financial planner Michael Leonetti of Buffalo Grove, Ill. tells clients under age 45 to sink up to 80% of their retirement savings into equities -- stocks or stock funds -- and then gradually decrease the equity percentage as they get older. (For more on how to adjust your portfolio as you approach retirement, see the story on page 88.)

5 You will sabotage yourself. Yes, you -- if you're like most Americans -- are the single most potent threat to your prosperous retirement. The danger: that you won't put enough aside or that you will squander your savings. The U.S. personal savings rate has stood at around 4% since the late 1980s, half what it was in the 1970s and a scandal compared with other developed countries. The Japanese, for instance, save at three times our rate, the Germans double. And despite an increased tendency to retire solo -- researchers estimate that about a third of all baby boomers will live alone in retirement, vs. just slightly over 20% of their parents' generation -- many singles spend like they expect to retire on someone else's savings. On average, married couples put away 5.4% of their pretax pay, single men save 3.1% and single women only 1.5% (see the profile at right). Even more unsettling, most people tend to blow their retirement savings while they are still employed. An EBRI study found that only 11% of the recipients of pre-retirement lump-sum distributions rolled the entire amount over into another tax-deferred retirement account; 34% spent the entire payout. The advice: Stop living only for today, and make a lifetime commitment to your 401(k). Fund it -- or your Keogh if you are self-employed -- to the max. A new pension study by KPMG Peat Marwick reveals that, on average, employees who do save through 401(k)s put in 5% of their compensation each year. According to Martha Priddy Patterson, director of employee-benefits policy and analysis for KPMG Peat Marwick in Washington and author of The Working Woman's Guide to Retirement Planning (Prentice-Hall, $15.95), doing this from age 22 to 65 yields an amount that will earn 35% of your income just before you retire. If you are a typical retiree, that will pay for just half of your needs. But if you were to set aside the maximum allowable by most plans -- 13% of compensation -- for the same amount of time, you would replace 91% of your final pay. "Einstein said that the greatest invention of all is compound interest," says Patterson. "The fortunate retirees will be those who wake up to this fact while they're still young."


With no pension, your retirement stash has to be up to eight times final pay.

Most people tend to blow their savings wads while they are still employed.