The Growing Challenge of Funding Retirement

Retirement at age 65 is becoming increasingly unattainable.

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[See 10 Reasons You Won't be Able to Retire at 65.]

"When you look at how much money people have in their 401(k)s, on which they are becoming increasingly dependant, the money just isn't there," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "This notion that you can put in 6 percent of pay and your employer puts in 3 percent is just not right. If we're going to rely on these 401(k)s plans, we need to put in a number closer to 15 percent rather than 9 percent."

You also can't count on getting a 401(k) match from every company you work for until you retire. Employer contributions vary considerably from company to company. They're often forfeited if you leave a job before you are vested in the retirement plan, and many companies suspended or eliminated them during the recession. Jason Unger, 28, of Silver Spring, Md., was saving 10 percent of his pay in a 401(k) plan and getting a 2 percent employer match, but in 2008 his employer suspended the 401(k) match. "When mine was cut I kept saving in the 401(k) for a while, but then we had our first kid, my wife stopped working, and I stopped for a while," Unger says. Now at a new job with a 401(k) match, Unger is saving for retirement again.

Even if you manage to win the 401(k) savings game by the time you retire, all it takes is one major health problem or chronic condition to strike out. While Medicare offers significant financial protections to retirees age 65 and older, it comes with many out-of-pocket costs, including premiums, deductibles, and coinsurance. Fidelity Investments estimates that a 65-year-old couple retiring in 2011 will need $230,000 to pay for medical care throughout retirement. And Medicare generally doesn't cover services that many retirees will need such as eyeglass, hearing aids, dental work, and most importantly, long-term care. "Your current expected out-of-pocket costs under today's system are likely to be an underestimate of what is going to happen to you by the time you get there," cautions Jack VanDerhei, research director at the Employee Benefit Research Institute.

[See Tips for Baby Boomers Reaching Retirement Age in 2012.]

The quickest fix for a too-small nest egg is simply to delay retirement. Working a few extra years packs the triple-punch of giving you more time to save, reducing the number of years your savings must finance, and it allows you to receive larger monthly checks from Social Security later on in retirement, when you are most likely to need the money. But staying in the workforce isn't always an option at a time when layoffs are common and companies are eager to unload their most expensive employees. The other alternative is to significantly downsize your lifestyle to the point where you can live on a combination of your Social Security checks, withdrawals from personal savings, and any other income sources you have. "You simply can't live to 100 and only work for 25 years to pay for it," says Mitchell. "It's simply not possible without cinching the belt much, much tighter than most of us would want to do."

Twitter: @aiming2retire