Despite a rebounding stock market and recent housing gains, retiring comfortably remains an elusive goal for the majority of Americans. Many whose plans for their "golden years" were disrupted by the recent recession must still work longer and save more to get back on track.

Fidelity Investments, which has 12.5 million participants in 401(k) plans, said 35% of those who left their jobs in the first nine months of last year cashed out an average of nearly $16,000. The trend was highest for those between the ages of 20 and 39; 41% of younger workers who lost jobs cashed out their 401(k) retirement savings.

For these younger workers, the impact on their retirement income is significant. According to one Fidelity calculation, a hypothetical 30-year-old who cashed out $16,000 from a retirement savings plan could forfeit $471 per month in retirement income, assuming he or she retires at 67 and lives to the age of 93. The individual also would pay $3,200 on that amount in taxes and $1,600 in penalties for early withdrawal, netting only $11,200 in cash. Fidelity's calculations assumed a real annual return of 4.7% on savings.

A December 2013 study by the Center for Retirement Research at Boston College found that its National Retirement Risk Index improved only slightly since 2010, when it found that 53% of Americans were at risk of being unable to maintain their pre-retirement standard of living. At the end of 2013, that share had improved to just 50% despite a 45% increase in the stock market and 6% increase in home prices over the previous three years, mainly because only the top one-third of American households is substantially invested in stocks.

Most Households Don't Own Stock

“Although there has been a recovery in the housing market, house prices in real terms have not got back to where they were in 2007," said Anthony Webb, senior research economist and an author of the study.

"They merely have recovered somewhat from the low point they reached subsequently. And as far as the stock market is concerned, it is hitting record highs, but the truth of the matter is that most households don’t have enough invested in the stock market for it to make that much of a difference. So the bulk of the increase in benefits has accrued to the relatively well off who were already at relatively low risk of falling short in retirement.” At the same time, for those born in 1960 and later, the age for full Social Security retirement benefits is rising to 67 from 65.

A different study on retirement security by the Employee Benefit Research Institute also concluded the probability of Baby Boomers and Generation X’ers running short on money in retirement had improved just slightly during 2013.

“In truth, saving more and working longer are the only viable alternatives and anyone who says otherwise is not being honest,” Webb said.

Saving more and working longer are easier said than done, however, at a time when many Americans are forced to retire earlier than they had planned due to job loss or illness, studies show. Long-term unemployed also are likely to take pay cuts when they do get back to work, other research suggests. Slow wage growth and rising costs of food, fuel and other necessities don’t help, either.

Ideas for Change

America is now saving about 2% of its net national income and investing 4% (with the difference being made up by foreigners investing in the U.S). In the early 1950s, the national saving rate was 15%, and the U.S. domestic net investment rate was 15%, said Boston University economist Laurence Kotlikoff, who advocates scrapping the current employer-based retirement system entirely and replacing it with a Personal Security Account.

Beth McHugh, Vice President of Market Insights at Fidelity Investments, says young people starting out and those in the prime of their careers should strive to contribute at least the minimum necessary for the company match in their 401(k) plans and increase their contributions by at least 1% a year until they reach 15% of income, taking advantage of target date or managed funds.

Since 2006, employers have implemented automatic enrollment in their 401(k) plans with default contributions of 3%, but many workers fail to increase their savings rate after that, McHugh said. As well, employees should try mightily to avoid tapping their 401(k) savings for any reason but retirement.

“It shouldn’t be the go-to source for emergency savings,” she said.

Workers over 50 should take advantage of catch-up provisions to increase their 401(k) contributions, and those who have suffered a gap in employment should try to get back on track with a higher 401(k) contribution when they do find a new job.

Sell the House

The growing number of Americans who are self-employed, independent or contract workers must also set aside money for retirement in a systematic way, using IRAs and other tax-favored retirement plans, she said.

“For certain, anyone finding themselves in or contemplating going out on their own should look at their retirement and try to replicate it with a financial advisor and sitting down and understanding the short-term and long-term implications and costs associated with that,” she said.

Kotlikoff suggested some people may need to consider starting a side business or second job specifically to help fund their retirement, and that federal and state governments should make it possible to start a small business in a day.

Webb suggested that many Americans approaching retirement age should consider downsizing their homes earlier in order to set aside more money for retirement.

“Most boomers have relatively large amounts of housing equity and downsizing has the advantage of helping them save and reducing expenses,” he said. “Rather than heat the empty bedroom, that money could go into your 401(k),” he said.

The Bottom Line

Despite the rise in asset values, including stocks, most Americans who haven't yet retired will be hard pressed to fund their golden years.

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