At the same time, President Bush's tax simplification committee has proposed overhauling the alphabet soup of tax-deferred retirement accounts by creating uberaccounts that could eventually replace 401(k)'s and IRA s as we know them. If this proposal--which has yet to be embraced by the White House--ever comes to pass, it will only add to the confusion.
Easy does it. Regardless of what the government does, the 401(k)--or some iteration of it--is likely to be a worker's best friend over the next quarter of a century. Jeff Carney, president of Fidelity's personal investments division, notes that "maxing out on your 401(k), especially if there's a company match, is the easiest way to save."
Benna agrees. The father of the 401(k), who recently founded a benefits firm that helps small companies offer retirement plans, says workers should be saving more in their 401(k)'s. "Do we have better alternatives than the 401(k)?" he asks. "The answer is still no."
So what can older workers do to repair or jump-start their 401(k)'s? For starters, it's important to keep things in perspective. While planners are right to fret over the state of older boomers' retirement savings--after all, that's their job--boomers need to be mindful of a few facts:
There's more to retirement savings than just the 401(k). Some older boomers, for example, are still fortunate to have guaranteed pensions from their employers.
Social Security, while less secure than it used to be, is still likely to cover about 40 percent of a typical middle-class retiree's annual income--and more for working-class households.
Don't discount the biggest financial asset that you probably own--your home. Retirees who have paid off their mortgages can count on having additional income at their disposal. Home equity also could provide another source of income, as could reverse mortgages.
All told, some boomers might find themselves with 50 percent or more of their retirement income needs taken care of.
Now, let's turn to the 401(k).
Calculate how much you'll need to retire, starting by determining how much annual income you'll require to fund a comfortable retirement.
Once you do that, you can work backward. Say you figure you'll need $50,000 a year to live comfortably in retirement. And you assume that a combination of Social Security, pension income (if you have it), and home equity will pay for half of this. This means your 401(k) needs to cover the remaining $25,000 or so.
How big would your 401(k) have to be to safely generate $25,000? Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research, says a simple formula is the "Rule of 25." Figure how much you'll need to withdraw from your savings in the first year of retirement--and then multiply that by 25. So, in this example, 25 times $25,000 equals $625,000.
Concentrate on boosting your savings rate. Let's face it: Most workers don't have anything close to $625,000 in their 401(k)'s. So what are the options?
Other than delaying retirement, you really only have one safe choice--and that's to save as much as you can in your remaining working years, says Mike Scarborough, president of the Scarborough Group, an investment advisory firm. "If you're going to be aggressive at this stage in your life, be aggressive in saving, not in how you invest," he says.