How to Put Your Retirement Back on Track

New study of investment, real estate crashes calculates specific paths to restore retirement nest eggs.

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People may be able to restore their recession-damaged retirement plans by making relatively small additions to their savings. Even people nearing retirement—those born between 1948 and 1954—need to boost savings by as little as 3 percent to nearly 7 percent a year. The make-up needs for younger groups are much smaller, according to a detailed study from the Employee Benefit Research Institute (EBRI), a business-funded think tank.

The institute stressed that these figures apply only to people who earn enough money to be able to afford boosting their retirement savings. Many people in the lower half of wage earners would have to set aside unrealistic percentages of their pay—more than 25 percent—to even have a chance at funding an adequate retirement. For higher-earning households, the range of the "make up" payments reflects different probabilities of success, plus a person's age, income, and mix of investments during the 2008-09 market downturn.

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During the recession, between 3.8 percent and 14.3 percent of households were added to the roles of being at risk of having inadequate retirements, EBRI said. The extent of the damage depended on a householder's age, whether they had investments in 401(k)s and IRAs, and if they owned a home and had positive equity in it.

EBRI looked at "early boomers" (born between 1948 and 1954), "late boomers" (born between 1955 and 1964), and "Generation Xers" (born between 1965 and 1974). In 2010, the percentages of these groups at risk of not having enough money for even a basic retirement was 47.2 percent for early boomers, 43.7 percent for late boomers, and 44.3 percent for Generation Xers. Basic retirement was defined as being able to cover non-discretionary household spending plus uninsured health costs.

There are, the study notes, large ranges in the at-risk numbers depending on income levels, years until retirement, and the probability of having a successful retirement. The overall at-risk percentages are, by definition, averages that lump all preretirees together and assume average savings, average earnings, average life spans, and a 50 percent chance of achieving an adequate retirement.

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Jack VanDerhei, EBRI research director and author of the report, builds upon recent EBRI work that concluded retirement prospects have improved. These gains were attributed to higher employee participation in 401(k) plans and better investment returns, EBRI said, and were driven largely by implementation of the 2006 Pension Protection Act. This newer information was reflected in EBRI's 2010 revision of its "Retirement Readiness Ratings."

"Comparing the 2003 and 2010 Retirement Readiness Ratings shows at least a double-digit decrease in 'at-risk' percentages for all groups except the lower-income" quarter of early boomers, the study said. However, it noted that this group already had little "real chance of having retirement income adequacy" and also had the least time to rebuild retirement portfolios.

"Informing policymakers of the percentage of various demographic groups that are likely to be at risk for inadequate retirement income is an extremely valuable exercise," the study said. But it said it was equally important to determine how much additional money people needed to save to mitigate those risks.

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In determining these "make up" amounts, the study excluded people who already have enough money for retirement as well as lower-earning households that realistically can't afford to boost retirement savings. Looking at the median needs for remaining earners, here are the study's conclusions about the amounts of extra savings (in addition to current retirement savings) that the three age groups would need to set aside each year by the age of 65 to fund adequate retirements. It also calculated the amounts it said would guarantee retirement adequacy 50 percent, 70 percent, and 90 percent of the time. The ranges within each probability reflect a household's investment mix, with the higher savings additions needed for households that suffered 2008-09 losses from real estate as well as retirement account holdings.

Early boomers:

50 percent likelihood: 3.0 to 5.6 percent.

70 percent likelihood: 3.8 to 6.5 percent.

90 percent likelihood: 4.3 to 6.7 percent.

Late boomers:

50 percent likelihood: 0.9 to 2.1 percent.

70 percent likelihood: 1.1 to 2.0 percent.

90 percent likelihood: 1.2 to 2.0 percent.

Generation Xers:

50 percent likelihood: 0.3 to 0.5 percent.

70 percent likelihood: 0.3 to 0.6 percent.

90 percent likelihood: 0.3 to 0.5 percent.

Twitter: @PhilMoeller