Bemoaning the small size of many people’s nest eggs, Mr. VanDerhei said workers with traditional pensions were generally in far better shape than those with 401(k)’s, because pensioners receive a defined monthly benefit for life. In even worse shape, he said, are the majority of workers who have neither a pension nor a 401(k) plan at work.
Many Americans with 401(k)’s do not save enough, many empty their accounts for living expenses when they lose their jobs, and many, Mr. VanDerhei said, skew their accounts too much toward equities, often in their own companies’ stock — bitter medicine when the stock market plunged. And some workers drain their 401(k) accounts to help pay for college for their children; indeed, the soaring cost of college prevents many parents from even saving for retirement.
A big question is, how much should one save? Traditionally, many financial planners put forward a rule of thumb that one’s postretirement income — through Social Security, savings and pensions — should be 65 to 85 percent of one’s preretirement income. Postretirement income can be lower, the logic goes, because one will no longer be making contributions to Social Security, commuting or buying as many suits.
But many financial planners steer people away from relying on a theoretical retirement replacement rate. Instead, they recommend using a retirement calculator to estimate how much they will need to save each year to reach their goal. (AARP has a highly recommended calculator: www.aarp.org/retirementcalculator.)
Some calculators ask people to insert the annual return they hope to achieve, but planners warn against seeking ambitious returns because they can involve a lot of risk. It is vital to assess one’s risk tolerance, said Tom Orecchio, a financial planner in Westwood, N.J.
“Everyone thought their risk tolerance was one thing until they lived through the financial crisis, and then they realized their risk tolerance was very different,” he said. Some still expect investment returns of 8 percent a year, but, Mr. Orecchio said, 4 to 5 percent is a far more realistic goal.
Fred Sanford, 59, moved to Orlando, Fla., from Illinois in 2004 to take a job as a financial adviser with Merrill Lynch, helping to attract clients and invest their money. He steadily put aside money for retirement, he said, investing it conservatively, but nonetheless “lost a chunk” in the stock market after Lehman Brothers collapsed in 2008. Not only that, Merrill laid him off 18 months ago. “I guess I hadn’t saved enough for retirement, nor do I think anybody else has,” he said. “What is enough?”
He has tried to climb back into financial services, but to no avail. To help make ends meet, Mr. Sanford and his wife have begun letting out a room in their house. In addition, helped by his Web site fredsanfordmusic.com, he plays piano several nights each week — “boomer tunes, Billy Joel and Stevie Wonder,” he said — at wine bars and country clubs. Retirement is nowhere in sight, he acknowledged, adding, “60, 65 is the new 40, 45.”
Fortunately, his wife still has her job as a school paraprofessional who works with autistic children in Orlando, where thousands of homes have been foreclosed upon and many families with children are homeless.
“You have to be grateful in life for what you have because no matter how bad you have it, there are those worse off than you,” Mr. Sanford said.
Mr. Orecchio recommended that everyone sit down to do retirement planning as well as a cash-flow analysis to determine how much is coming in and spent each month. Without that, he said, it is hard to figure out how much one can afford to save for retirement.
He said not just households with incomes of $1 million a year need financial planners but also those with incomes of $50,000, $70,000 or $100,000 a year. They can often find such planners through the National Association of Personal Financial Advisers, a fee-only group.
Financial planners like him often say that Americans do not begin to understand how much they should be setting aside. If a couple hopes to live on $60,000 a year in retirement, they might receive $30,000 in Social Security benefits and then draw down $30,000 a year from their savings and investments. Assuming the recommended drawdown of 4 percent a year, a nest egg of $750,000 might be needed.
Financial experts generally urge workers to try their hardest to invest the maximum amount allowed into their 401(k) each year — $17,000 for 2012 under current law, with a catch-up provision allowing people 50 and over to contribute an additional $5,500. “I tell my clients that is nonnegotiable; they’ve just got to do it,” Mr. Papadopoulos said.
Of course, that is far more than many workers can afford to set aside, but putting $17,000 instead of $5,000 into one’s 401(k) means no income taxes on an extra $12,000. (In case you are wondering, some tax experts have noted that the 401(k) tax breaks go disproportionately to the affluent.)
Mr. Papadopoulos said, “I tell my clients to practice these basic things: diversify, keep costs low, be mindful of Uncle Sam and focus on the things you can control.”
One thing many Americans can control is when they will start receiving Social Security benefits. Many advisers recommend delaying that move until you really need the money. For Americans born from 1943 to 1954, the retirement age for full Social Security benefits is 66. That age rises in steps to 67 for those born in 1960 or later.
If one qualifies, say, for $1,500 a month in Social Security benefits at 66, and begins taking early benefits at 62, under current rules, those benefits will be 25 percent lower, or $1,125 a month. But if one takes a chance on longevity and decides not to draw benefits until age 70, then one would receive 32 percent more than normal benefits or, in this case, $1,980 a month. “It’s an inexpensive way of taking a better annuity,” said Mr. Certner of the AARP.
Among financial planners, there is considerable debate about whether to buy annuities. Ms. Lassus said she did not recommend annuities, saying, “We look at Social Security as an annuity.”
Mr. Orecchio disagreed, occasionally recommending annuities “as a steadying factor for income in retirement.” Mr. Papadopoulos, however, cautioned against buying variable annuities that rise with inflation, calling them too expensive. “Fixed annuities will serve the purpose,” he said. An annuity starting at age 70 and paying a lifetime monthly income of $2,000, or $24,000 a year, can cost about $300,000 for a man and $330,000 for a woman (the actuarial tables say she’ll live longer).
There is a similar debate about long-term care insurance. Mr. Certner said many people did not plan ever to enter a nursing home, which can be very expensive. So he recommended that people consider long-term care insurance, lest nursing homes wipe out all their savings.
Ms. Munnell is less enthusiastic about long-term care insurance. Not only can it be very expensive (typically, $2,800 annually if purchased at age 55, for a plan offering $150 a day for four years) but insurers sometimes increase the premiums 20 percent or more in a year, forcing some to drop their insurance after they have paid tens of thousands of dollars for it over decades.
She said she worried that nursing home costs and the failure of many older Americans to save nearly enough for retirement would saddle many of their children with major burdens: providing financial support and care for their parents.
“Older people are reluctant to turn to their children, but their children are going to feel compelled to help,” Ms. Munnell said. “You can’t have a vulnerable elderly population in isolation. It’s going to affect everybody.”