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The New Age of Retirement

How to Revitalize Your Plans

Almost half of all workers aren’t prepared financially to retire, and shrinking private pension funds and the uncertainty of federal retirement benefits might make your golden years seem dim. But glimmers of hope, such as new trends in 401(k) plans and money-management tools, still shine.

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If you’re like many Americans, you’re looking forward to retirement. You’ll be able to golf as much as you’d like. You can travel to places that you’ve always wanted to go. You’ll be able to start that alpaca farm.

The first wave of the biggest generation in history—the 77 million baby boomers—has reached 65, which is the traditional retirement age. But that still leaves millions more in the workforce who are saving for their golden years, and Americans are less prepared for retirement than they were 4 years ago, before the financial meltdown that led to the biggest bear market since the Great Depression.

Big rallies in stocks and bonds since 2009—and increased savings—have helped to put some people back on track toward a good retirement, according to a study by nonpartisan Employee Benefit Research Institute (EBRI). But even so, the same study shows that nearly half of all workers aren’t even in the running.

Traditional pension plans rapidly are becoming a thing of the past for employees in the private sector, and public workers can expect cutbacks in pension and medical benefits, too. And although the details haven’t been hammered out, future retirees can expect to pay more for health care and to get less from Social Security.

But don’t give up, because there’s good news. Automatic enrollment in 401(k) savings plans, which is an effective way to boost retirement savings, is a new trend in employee benefits. And companies that suspended 401(k)-plan matching programs during the financial crisis largely have restored them.

Also, new products, such as target-date funds, which put your retirement portfolio on autopilot, and inflation-adjusted annuities, which guarantee retirement income for life, make retirement planning easier. But “easier” doesn’t mean easy, and today’s economic uncertainties don’t guarantee happy endings.

SLOW PROGRESS. Make no mistake: These days, you are your main source of retirement security, because traditional pension plans continue their slide toward extinction. Just 13 of the Fortune 100 companies now provide a traditional pension plan for newly hired workers, according to professional-services company Towers Watson. Four years ago, 27 of those companies did.

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It isn’t just pension plans that have taken a hit. According to EBRI, just 53 percent of all nonmilitary employees have a defined-contribution plan, such as a 401(k) plan or a 403(b) plan (for nonprofits), available through work. And only 31 percent of all eligible workers participated in defined-contribution plans in 2010, versus 33 percent in 2008. The grim reality is that the recession—and the lack of any income growth—has prompted people to stop contributing to their retirement plans.

EBRI research shows that in 2010, 47.2 percent of older baby boomers—those who were born between 1948 and 1954—were at risk of running out of money for basic retirement expenses and uninsured health costs. (That isn’t a cheery figure, but 8 years ago, 59.2 percent of early boomers were at risk of running out of money.)

Much of that improvement is because companies are switching to auto-enrollment for 401(k) savings plans, says Jack VanDerhei, who is the research director at EBRI. If your employer has an auto-enrollment plan, you will be put into a 401(k) plan when you’re hired. Typically, your employer automatically will hike your contribution rate by 1 percentage point each year until it reaches a set level—typically the percentage of your contributions that the company matches. (The most common match is dollar for dollar, up to 6 percent of contributions). You have to opt out, rather than opt in. Thanks to inertia, most people stay in, and—presto—that means that more people are saving for retirement.

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