The Employee Benefit Research Institute (EBRI) shows 27% of people over 24 years of age have saved less than $1,000 toward their retirement! Additionally, the survey showed 54% have saved less than $25,000!

It is shockingly clear that a large percentage of Americans have saved little or nothing for retirement.  While recognizing job losses, mortgage problems, and the suspension by many companies of 401K employee contribution matches in 2009, the economy is not the entire problem. In previous years, there were a huge number of workers who had little or nothing saved. This is a major, ongoing problem. The void between what Americans are saving and what they will need to live in retirement is a big concern.

Financial planners stress that retirement savings, including social security, any company pension, and personal savings and investments should provide about 80% of preretirement income.

According to the EBRI survey, a big problem that exists with many people is that they have never tried to calculate what they will need for a comfortable standard of living in retirement—nor what they will need to do to achieve it. Too many people put off any thought of retirement planning until it is too late to do much about it.

First Steps to Retirement Planning

As a first step, you need to determine how big your nest egg should be at retirement and how much you need to save in the coming years to meet this goal.  There are many excellent retirement calculators on various internet sites that can help you in this process. Two, one at vanguard.com and the other at troweprice.com, are among the better ones and not difficult to use.  

By inputting answers to a few basic questions such as years to retirement, savings and investments to date, your current income, how much you save per month, and desired retirement income—the calculator will determine the probability of meeting your retirement goals. If it looks like you will fall short, the calculators provide suggestions to make up for the potential shortfall.

This process can give you a big boost in your retirement planning and help get you on a path to achieve a comfortable living standard in retirement.  Once the plan is in place, you can review and modify it as circumstances in your life evolve and change.

Plan Implementation

Once you have a savings and retirement plan established, take full advantage of tax-advantaged accounts such as the 401K, the traditional or Roth IRA, as well as your taxable brokerage accounts.

Many companies are planning to restore the 401K matching feature they suspended or reduced in the last couple of years. According to Hewitt Associates, a human resources consulting company, 80% of these companies are planning to restore the match in 2010. Depending on the extent of the match and the quality of investment opportunities, the 401K is hard to beat. The company’s match essentially provides 100% return on your contribution—this is “free money”.

In addition, a couple of new options planned by many companies in their 401K plans are (1) automatic portfolio rebalancing to keep employees portfolio diversification and asset allocation on track to meet their goals, and (2) automatic employee contribution increases over time. These options, along with the 401K matching feature can enhance your portfolio’s compounded growth while keeping you on course to achieve your specific retirement goals.

Put any surplus savings into a traditional or Roth IRA after you have maxed out your contributions to your 401K—at least up to the company’s maximum percentage match.  If you are stuck in a 401K plan with high fees and/or a lack of many good investment choices, after the company match, invest in an IRA where you have a lot more freedom in your choices of investments. As much as possible, the goal should always be to invest in low cost, diversified investments, and then to establish an asset allocation tailored to meet your specific retirement investment goals and needs.

For year 2010, you can put up to $16,500 into a 401K, and additional $5,500 catch-up contributions for workers age 50 or older. For IRAs, you can contribute up to $5,000 and an additional $1,000 for workers age 50 or older.  

Bottom Line:

• Large numbers of people have saved little or nothing for retirement
• A major problem is they have never tried to calculate their retirement needs and therefore have no goals or plan
• There are many excellent retirement planning calculators on line to help establish a retirement plan  
• 401Ks and IRAs are superb tax-advantaged vehicles to help implement a retirement plan along with a taxable brokerage account
• A good retirement plan can help determine how well you live in retirement and how much financial freedom you enjoy.