The words "retirement" and "baby boomers" are forever linked. The boomers are living longer, retiring earlier and enjoying more active golden years than any previous generation. Unfortunately, according to recent studies by Hewitt Associates LLC and the Center for Retirement Research at Boston College, the generations that follow them aren't faring as well in the retirement savings department. We'll present the data on retirement savings for Generations X and Y and explain why the younger generations need to save even more than their parents.

The Changing Face of Retirement
While boomers (aged 42 to 59) often have pension checks to supplement their Social Security income, future generations aren't so lucky. Employer-sponsored defined-benefits plans are on the road to extinction as employers replace them with defined contribution plans. Social Security is projected to replace a smaller and smaller portion of retirement income for each succeeding generation. The Social Security Administration notes that by 2041, "There will be enough money to pay only about $0.74 for each dollar of scheduled benefits." When the entity that sends out the checks warns that it is going to run out of money, younger workers should be maximizing the amount they contribute to defined contribution plans - unfortunately, this isn't what's happening. (To learn more, read Introduction To Social Security and The Demise Of The Defined-Benefit Plan.)

Generation X and Y are Falling Behind in Savings
Among workers aged 26 to 41, 37% do not participate in an employer-sponsored retirement savings plan, according to a 2006 report released by Hewitt Associates. The report further notes, that without any 401(k) plan savings, these workers can expect their retirement incomes to replace just 44% of the income they earned during their working years.

Even those who do save don't save enough. The Center for Retirement Research at Boston College cites 49% of the members of Generation X are "at risk" of reaching retirement without having enough money to actually retire. Hewitt Associates notes that buying a house and paying for children are commonly cited as greater priorities than saving for retirement.

When it comes to retirement planning, the generation characterized by youthful ambition hasn't grown up yet. Among people aged 18 to 25, 69% of eligible employees do not participate in an employer-sponsored retirement savings plan according to Hewitt Associates. Interestingly enough, this means that the number of Generation Y members that don't participate in employer-sponsored plans is nearly equal to the number of Generation Xers that do.

While the lack of knowledge about investing is frequently cited as the reason for not saving, it's a problem that should be easy to fix for a generation characterized as tech-savvy and having a futuristic mindset. The internet provides easy access to a virtual library filled with information about how and why to save for the future. (For more information on saving, see Delay In Savings Raises Payments Later On and Fundamentals Of A Successful Savings Program.)

How to Make Expectations and Reality Meet
Despite their failure to save, both Generations X and Y have high hopes for the power of investments to save the day when it comes to retirement. Hewitt reports that 93% of Generation X and 92% of Generation Y expect their 401(k) plans to provide income for retirement.

In order to make these hopes a reality, contribution rates to 401(k) plans need to jump significantly. According to Hewitt Associates, Generation Xers contribute an average of 7.2% of their pre-tax salary to employer-sponsored savings plans and members of Generation Y contribute just 5.6%. Boomers, on the other hand, put away 8.3% of their salaries.

Despite the low savings rates, members of Generations X and Y still have time to act. Members of Generation X that do contribute to their employer-sponsored retirement savings plan can increase the amount of expected income during retirement to 95.7% of what they earned during their workings years, according to the Hewitt study. Members of Generation Y can do even better, as they have more time to save.

Regardless of your generation, if you aren't already nearing retirement age and covered by a pension plan, the burden of saving for your future is likely to fall squarely on your own shoulders. Rather than ignore it and hope for the best, the time to plan and act is now. To get started, find out whether your employer offers a 401(k) program and whether or not the company matches employer contributions.

If there is a match retirement savings program in place, you can start to save for your future by contributing at least enough to earn that match. With many plans, a 6% contribution earns a 3% match. That's a 50% return on your investment even if the investment you select never increases in value. Once you're getting the match, increase your contribution rate each year when you get a raise.

Before long, you'll be on your way to building a nice nest egg. If your employer does not offer a 401(k) plan, it's time to open up an individual retirement account (IRA). While you won't earn a company match in your IRA, you will still get the benefit of tax-deferred growth. Regardless of whether you save in a 401(k) plan or an IRA, the important thing is that you save.


To read more on the subject, see Determining Your Post-Work Income, A Tour Through Retirement Plans and Retirement Planning Basics.

by Lisa Smith, (Contact Author | Biography)