Retirement at risk: Who's falling short

NEW YORK (CNNMoney.com) -- How would you feel about doubling or tripling your 401(k) contributions?

For some people, that may be the only solution if they want to maintain their current lifestyle in retirement.

The Center for Retirement Research (CRR) estimates that 36 percent of high-income households - those with a median income of $117,000 - won't be able to live as well in retirement as they do today. Among middle-income households, 40 percent are at risk of having to downsize, while 53 percent of low-income households are likely to fall short.

That hasn't always been the case.

"We're at the tail end of the golden era of retirement," said CRR Director Alicia H. Munnell.

In a report released Tuesday, CRR notes that only 20 percent of those who were between ages 51 and 61 in 1992 were at risk of falling short of money in retirement. Today, 32 percent are.

Why the increase? Munnell points to the shift from traditional pension plans to 401(k)s. Plus, she notes, people are living longer, and Medicare and taxes will take a bigger slice out of Social Security checks.

In another report released Tuesday, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute showed that while 401(k) balances have increased, they are still low. For example, among long-tenured employees in their 50s who make between $60,000 and $80,000 a year, their median 401(k) balance in 2006 was just under $164,000.

But a 51-year old who makes $80,000 but only has $164,000 in savings would need to put away 23 percent of his salary - or close to $19,000 a year - if he wanted to retire at 65, according to savings guidelines from Ibbotson Associates. That would give him enough money, in combination with his Social Security benefits, to live on 80 percent of his pre-retirement income minus his annual 401(k) contribution.

That 23 percent is almost three times the average contribution rate (8.3 percent) among people in that age and income group. And it's twice the total contribution rate (11.3 percent) when you kick in a 3 percent employer match.

Do It Now: Get on track for retirement

CRR considers households to be "at risk" if your savings plus Social Security and pension benefits combined will fall at least 10 percent short of the income you'll need in retirement to support the same standard of living you enjoyed while working.

CRR assumes you retire at age 65, annuitize your 401(k) savings and take out a reverse mortgage, where a mortgage lender pays you for your house in regular installments. Change any of these assumptions and the percentage of households at risk becomes considerably higher.

"People enter retirement thinking that they'll be able to live exactly as they did before," Munnell said. But among households at risk, she predicts, they will find out they're spending more and their income is less than they thought.

Munnell supports changes to employer-based retirement savings, such as auto enrollment in 401(k)s and the proposed auto IRA, whereby an employer that doesn't sponsor a 401(k) could let workers direct-deposit payroll deductions into IRAs.

But those measures alone won't solve the problem, Munnell said. She believes a new retirement savings tier needs to be added on top of Social Security and work-based plans. Specifically, she thinks government should require workers to make small mandatory contributions from their paychecks.

Of course, for families who aren't saving adequately because they're pressed financially, suggesting they save more isn't going to do much. Instead, Munnell thinks workers will come a lot closer to having adequate savings if they work until they're 66.

Today, the average age men retire is 63 and for women it's 62. Meanwhile, a majority of Social Security eligible workers opt to take their benefits early, which means they receive a permanently reduced check. Retiring at 66 or later lets your investments to compound longer, ensures you get a bigger Social Security check and reduces the number of years in retirement.

A CRR survey of early retirees found that 30 percent had retired early either because of job loss or health reasons. "So a lot of people wouldn't be able to take the prescription to work longer," Munnell said. "But 70 percent can."