MONEY retirement income

Why Workers Undervalue Traditional Pension Plans

Gold egg in nest in dark
Simon Katzer—Getty Images

Lifetime income is the hottest button in the retirement industry. So why do workers prefer a 401(k) to a traditional pension?

Despite many drawbacks, the 401(k) plan is our most prized employee benefit other than health care, new research shows. More than half of workers value this savings plan even above a traditional pension that guarantees income for life.

Some 61% of workers with at least $10,000 in investments say that, after health care, an employer-sponsored savings plan is their most important benefit, according to a Wells Fargo/Gallup Investor poll. This is followed by 23% of workers naming paid time off, 5% naming life insurance, and 4% naming stock options. Some 52% say they prefer a 401(k) plan to a traditional pension.

These findings come as new flaws in our 401(k)-based retirement system surface on a regular basis. Plans are still riddled with expenses and hidden fees, though in general expenses have been going down. Too many workers don’t contribute enough and lose out by borrowing from their plans or taking early distributions. Most people don’t know how to make a lump sum last through 20 or 30 years of retirement. And the common rule of withdrawing 4% a year is an imperfect strategy.

The biggest flaw of all may be that most 401(k) plans do not provide a guaranteed lifetime income stream. This issue has gotten loads of attention since the financial crisis, which laid waste to the dreams of millions of folks that had planned to retire at just the wrong moment. Many were forced to sell shares when the market was hitting bottom and suffered permanent, devastating losses.

Policymakers are now feverishly looking for seamless and cost-effective ways for retirees to convert part of their 401(k) plan to an insurance product like an immediate annuity, which would provide guaranteed lifetime income in addition to Social Security and give retirees a stable base to meet monthly expenses for as long as they live. Such a conversion feature would fill the income hole left by employers that have been all but eliminating traditional pensions since the 1980s.

With growing acknowledgement that lifetime income is critical, and largely missing from most workers’ plans, it seems odd that so many workers would value a 401(k) over a traditional pension. This may be because guaranteed income doesn’t seem so important while you are still at work or, as has lately been the case, the stock market is rising at a rapid pace. It may also be that the 401(k) is the only savings plan many young workers have ever known, and they value having control over their assets.

Seven in 10 workers have access to a 401(k) plan and 96% of those contribute regularly, the poll found. Some 86% enjoy an employer match and 81% say the match is very important in helping to save for retirement. The 401(k) is now so ingrained that 77% in the poll favor automatic enrollment and 66% favor automatic escalation of contributions. Four in 10 even want their employer to make age-appropriate investments for them, which speaks to the soaring popularity of automatically adjusting target-date mutual funds.

Read next: How Your Earnings Record Affects Your Social Security

MONEY 401(k)s

401(k)s Are Still a Problem, But They’re Getting Better

Employers are providing more and better choices and driving down fees as they come to grips with their place in the retirement equation.

As 401(k) plans have emerged as most people’s primary retirement savings account, the employers who sponsor these plans generally have beefed up investment choices and driven down fees, new research shows. Small plans remain the most inefficient by a wide margin.

The typical 401(k) plan has 25 investment options, up from 20 in 2006, and the average worker in a plan has annual plan costs equal to 0.53% of assets, down from 0.65% of assets in 2009, according to a study from BrightScope and the Investment Company Institute.

These findings suggest that after years of dumping traditional pensions and trying to avoid the role of retirement planner for workers, companies have on some level accepted their critical place in the retirement security equation. Change has come slowly. But the BrightScope/ICI study shows positive momentum in key areas.

Expense ratios are down by every measure: total plan cost, average participant cost, and average cost of invested dollars. Volumes of research show that costs are a key variable in long-term rates of return. That is why low-cost index funds, most often championed by Vanguard’s John Bogle, have become investor favorites and 401(k) plan staples. These funds account for a quarter of all 401(k) plan assets, the study shows.

Meanwhile, investment options have increased in a way that makes sense. The broadened choice is largely the result of adding target-date mutual funds, possibly the most innovative financial product for individuals in the past 20 years. These are one-stop investments that provide diversification and automatically shift to a more conservative asset allocation as you near retirement. Nearly 70% of plans now offer them, up from less than 30% in 2006, and in many plans they are the default option.

For those in small plans, though, the news isn’t so good. Expenses remain high: In plans with fewer than $1 million in assets, the average expense ratio for domestic equity mutual funds is 0.95%, versus 0.48% for plans with more than $1 billion in assets. Small plans are also far less likely to include an employer matching contribution: Just 75% of plans with fewer than $10 million in assets provide a match, vs. 97% of plans with more than $100 million in assets. Small plans are also less likely to automatically enroll new employees.

The most common match is 50 cents on the dollar up to 6% of annual pay, followed closely by a dollar-for-dollar match on up to 6% of pay.

One area with clear room for improvement is the default contribution rate in plans that automatically enroll new hires. Nearly 60% of these plans set the rate at just 3% of pay and 14% set it at 2% of pay. Only 12% had a default contribution rate of at least 5% of pay. Most advisers say you should contribute at least enough to get the full company match, which is often 6% of pay, and contribute even more if possible. Your savings goal, including the company match, should be 10% to 15% of pay.

The venerable 401(k) still has many problems as a primary retirement savings vehicle. Too many people don’t contribute enough, don’t diversify, and don’t repay loans from the plans; too many take early distributions and try to time the market. 401(k) plans don’t readily provide guaranteed retirement income, though that is changing, and because you don’t know how long you’ll live you have to err on the conservative side and save like crazy.

But we are headed the right direction, which is good, because for better or worse the 401(k) is how America saves.

Get answers to your 401(k) questions in the Ultimate Retirement Guide:
How Should I Invest My 401(k)?
Which Is Better for Me, Roth or Regular?
What If I Need My 401(k) Money Before I Retire?

 

MONEY 401(k)s

This New Retirement Income Solution May Be Headed for Your 401(k)

Target-date mutual funds in 401(k)s can now add an annuity feature, which will provide lifetime income in retirement.

The stunningly popular target-date mutual fund is getting a facelift that promises to cement it as the premier one-stop retirement plan. By adding an automatic lifetime income component, these funds may now take you from cradle to grave.

Last month the federal government blessed new guidelines, on the heels of initial guidance last summer, which together allow savers to seamlessly convert 401(k) assets into guaranteed lifetime income. Specifically, the IRS and the Treasury Department will allow target-date mutual funds in 401(k) plans to invest in immediate or deferred fixed annuities. Plan sponsors can choose to make these target-date funds the default option, meaning workers would have to opt out if they preferred other investments.

Target-date funds are widely considered one of the most innovative investment products of the past 20 years. They automatically shift to a more conservative asset allocation as you age, starting with around 90% stocks when you are young and moving to around 50% stocks at age 65. By simplifying diversification and asset allocation, target-date funds have become 401(k) stalwarts.

They have broad appeal and are a big factor in the rising participation rate of workers, and of younger workers in particular. Nearly half of all 401(k) contributions go into target-date funds, a figure that will hit 63% by 2018, Cerulli Associates projects. By then, Vanguard estimates that 58% of its plan participants and 80% of new plan entrants will be entirely in target-date funds. In all, these funds hold about $1 trillion.

The annuity feature stands to make them even more popular by closing an important loop in the retirement equation. Now, at age 65 or so, a worker may retire with a portion of their 401(k) automatically positioned to kick off monthly income with no threat of running out of money. In simple terms, a target-date fund that has moved from stocks to bonds as you near retirement may now move from bonds to fixed annuities at retirement, easing concerns about outliving your money and being able to meet fixed expenses.

Policymakers have been working towards this kind of solution for the past several years, but have hit a variety of stumbling blocks, including tax and eligibility issues and others having to do with a plan sponsor’s liability for any guarantees or promises it makes through its 401(k) investment options. There are still implementation problems to be worked out, so few plans are likely to add annuities right away. But the new federal guidelines clarify the rules for employers and pave the way for broader acceptance of both immediate and deferred fixed annuities in 401(k) plans. And a guaranteed lifetime income stream is something that workers are clearly looking for in retirement.

More on 401(k)s from Money’s Ultimate Retirement Guide:

Why is a 401(k) such a good deal?

How should I invest in my 401(k)?

What if I need my 401(k) money before I retire?

Read next: Flunking Retirement Readiness, and What to Do About It

MONEY retirement planning

Flunking Retirement Readiness, and What to Do About It

red pencil writing "F" failing grade
Thomas J. Peterson—Alamy

Americans don't get the basics of retirement planning. Automating 401(k)s and expanding benefits for lower-income workers may be the best solution.

Imagine boarding a jet and heading for your seat, only to be told you’re needed in the cockpit to fly the plane.

Investing expert William Bernstein argued in a recent interview that what has happened in our workplace retirement system over the past 30 years is analogous. We’ve shifted from defined benefit pension plans managed by professional financial pilots to 401(k) plans controlled by passengers.

Once, employers made the contributions, investment pros handled the investments and the income part was simple: You retired, the checks started arriving and continued until you died. Now, you decide how much to invest, where to invest it and how to draw it down. In other words, you fuel the plane, you pilot the plane and you land it.

It’s no surprise that many of us, especially middle- and lower-income households, crash. The Federal Reserve’s latest Survey of Consumer Finances, released in September, found that ownership of retirement plans has fallen sharply in recent years, and that low-income households have almost no savings.

But even wealthier households seem to be failing retirement flight school.

Eighty percent of Americans with nest eggs of at least $100,000 got an “F” on a test about managing retirement savings put together recently by the American College of Financial Services. The college, which trains financial planners, asked over 1,000 60- to 75-year-olds about topics like safe retirement withdrawal rates, investment and longevity risk.

Seven in 10 had never heard of the “4% rule,” which holds that you can safely withdraw that amount annually in retirement.

Very few understood the risk of investing in bonds. Only 39% knew that a bond’s value falls when interest rates rise—a key risk for bondholders in this ultra-low-rate environment.

“We thought the grades would have been better, because there’s been so much talk about these subjects in the media lately,” said David Littell, who directs a program focused on retirement income at the college. “We wanted to see if any of it is sinking in.”

Many 401(k) plans have added features in recent years that aim to put the plane back on autopilot: automatic enrollment, auto-escalation of contributions and target date funds that adjust your level of risk as retirement approaches.

But none of that seems to be moving the needle much. A survey of 401(k) plan sponsors released last month by Towers Watson, the employee benefit consulting firm, found rising levels of worry about employee retirement readiness. Just 12% of respondents say workers know how much they need for retirement; 20% said their employees are comfortable making investment decisions.

The study calls for redoubled efforts to educate workers, but there’s little evidence that that works. “I hate to be anti-education, but I just don’t think it’s the way to go,” says Alicia Munnell, director of Boston College’s Center for Retirement Research. “You have to get people at just the right time when they want to pay attention—just sending education out there doesn’t produce any change at all.”

What’s more, calls for greater financial literacy efforts carry a subtle blame-the-victim message that I consider dead wrong. People shouldn’t have to learn concepts like safe withdrawal rates or the interaction of interest rates and bond prices to retire with security.

Just as important, many middle- and lower-income households don’t earn enough to accumulate meaningful savings. “We’ve had stagnant wage growth for a long time—a lot of people can’t save and cover their living expenses,” says Munnell, co-author of “Falling Short: The Coming Retirement Crisis and What to Do About It” (Oxford University Press, December 2014).

Since the defined contribution system is here to stay, she says, we should focus on improving it. “We have to auto-enroll everyone, and auto-escalate their contributions. Otherwise, we’re doing more harm than good.”

Munnell acknowledges that a better 401(k) system mainly benefits upper-income households with the capacity to save. For everyone else, it’s important that no cuts be made to Social Security. And she says proposals to expand benefits at the lower end of the income distribution make sense.

“Given all the difficulty we’re having expanding coverage with employer-sponsored plans, that is the most efficient way to provide income to lower-paid workers.”

Read next: The Big Flaws in Your 401(k) and How to Fix Them

MONEY retirement income

The Search for Income in Retirement

Why we may be focusing too much on our nest egg and not enough on cash flow.

There are three components to retirement planning: accumulation, investment, and managing for income. And while we are usually more fixated on “the number” on our balance sheet, the bigger challenge is ensuring that a retirement portfolio can generate enough steady money as we live out our days.

In a recent academic panel hosted by the Defined Contribution Institutional Investment Association (DCIIA), professors Michael Finke of Texas Tech and Stephen Zeldes of Columbia University illustrated the challenge of getting into an income mindset by discussing what’s known as the “annuity puzzle.”

If people were to take their 401(k)s and convert them into annuities, they would get a lifetime income stream. And yet very few people actually annuitize, in part because they don’t want to lose control over their hard-earned savings. “Getting people to start thinking about their retirement in an income stream instead of a lump sum is a big problem,” Finke told the audience.

Also at play is the phenomenon of present bias, whereby half a million dollars today sounds a lot better than, say, $2,500 a month for the rest of your life. This is a major knowledge gap that needs to be addressed. A new survey of more than 1,000 Americans aged 60-75 with at least $100,000 conducted for the American College of Financial Services found that of all of the issues of financial literacy, respondents were least informed about how to use annuities as an income strategy. When asked to choose between taking an annuity over a lump sum from a defined benefit plan in order to meet basic living expenses, less than half agreed that the annuity was the better choice.

Granted, annuities are complicated products. In the past, they got a bad rap for not having death benefits and otherwise misleading investors, but the industry has evolved, and there are now so many different options that it would be quite an undertaking to wade through and understand them all. And annuities aren’t the only way to generate income. Another option people might want to consider is a real estate investment that can throw off consistent revenues from rent. The point is to start thinking more not just about accumulating money but about how you can make that money work for you by turning it into an income-producing asset.

In the meantime, academics like Zeldes are working on how to make annuitization more appealing. In a paper published in the Journal of Public Economics in August 2014, Zeldes and colleagues suggest that people are more likely to annuitize if they can do so with only part of their nest egg, and even a partial annuity can be better than no annuity at all. Zeldes also found that people prefer an extra “bonus” payment during one month of the year, which means that they essentially want their annuity to seem less annuity-like. I’m all for product innovation, but in this case I think we’d be better off learning the value of a steady stream—especially over a fake “bonus.”

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Read more about annuities in the Ultimate Retirement Guide:
What is an immediate annuity?
What is a longevity annuity?
How do I know if buying an annuity is right for me?

MONEY retirement income

The Powerful (and Expensive) Allure of Guaranteed Retirement Income

141203_RET_Guaranteed
D. Hurst—Alamy

Workers may never regain their appetite for measured risk in the wake of the Great Recession, new research shows.

People have always loved a sure thing. But certainty has commanded a higher premium since the Great Recession. Five years into a recovery—and with stocks having tripled from the bottom—workers overwhelmingly say they prefer investments with a guarantee to those with higher growth potential and the possibility of losing value, new research shows.

Such is the lasting impact of a dramatic market downdraft. The S&P 500 plunged 53% in 2007-2009, among the sharpest declines in history. Housing collapsed as well. Yet the S&P 500 long ago regained all the ground it had lost. Housing has been recovering as well.

Still, in an Allianz poll of workers aged 18 to 55, 78% said they preferred lower certain returns than higher returns with risk. Specifically, they chose a hypothetical product with a 4% annual return and no risk of losing money over a product with an 8% annual return and the risk of losing money in a down market. Guarantees make retirees happy.

This reluctance to embrace risk, or at least the urge to dial it way back, may be appropriate for those on the cusp of retirement. But for the vast majority of workers, reaching retirement security without the superior long-term return of stocks would prove a tall order. Asked what would prevent them from putting new cash into a retirement savings account, 40% cited fear of market uncertainty and another 22% cited today’s low interest rates, suggesting that fixed income is the preferred investment of most workers. Here’s what workers would do with new cash, according to Allianz:

  • 39% would invest in a product that caps gains at 10% and limits losses to 10%.
  • 19% would invest in a product with 3% growth potential and no risk of loss.
  • 19% would invest in a savings account earning little or no interest.
  • 12% would hold their extra cash and wait for the market to correct before investing.
  • 11% would invest in a product with high growth potential and no protection from loss.

These results jibe with other findings in the poll, including the top two concerns of pre-retirees: fear of not being able to cover day-to-day expenses and outliving their money. These fears drive them to favor low-risk investments. One product line gaining favor is annuities. Some 41% in the poll said purchasing such an insurance product, locking in guaranteed lifetime income, was one of the smartest things they could do when they are five to 10 years away from retiring.

Lifetime income has become a hot topic. With the erosion of traditional pensions, Social Security is the only sure thing that most of today’s workers have in terms of a reliable income stream that will never run out. Against this backdrop, individuals have been more open to annuities and policymakers, asset managers and financial planners have been searching for ways to build annuities into employer-sponsored defined-contribution plans.

Doing so would address what may be our biggest need in the post defined-benefits world and one that workers want badly enough to forgo the stock market’s better long-run track record.

More from Money’s Ultimate Retirement Guide:

How do I know if buying an annuity is right for me?

What annuity payout options do I have?

How can I get rid of an annuity I no longer want?

MONEY 401(k)s

Are You Smart Enough to Boost Your 401(k)’s Return? Take This Simple Quiz

141119_RET_SmartEnough
Pete Ark/Getty Images

If you can answer these 5 basic questions, you'll likely earn bigger gains in your retirement plan.

Can knowing more about investing and finances boost your 401(k)’s returns? A recent study suggests that may be the case. But you don’t have to be a savant to improve performance. Even if you don’t know a qualified dividend from a capital gain, lessons from this research can help you fatten your investment accounts.

The more you know about finances and investing, the higher the returns you’re likely to earn in your 401(k). That, at least, is the conclusion researchers came to after giving thousands of participants of a large 401(k) plan a five-question test to gauge how much they know about basic financial concepts and then comparing the results with investment performance over 10 years.

You’ll get your turn to answer those questions in a minute. But first, let’s take a look at what the study found.

Savvier Investors Hold More Stocks

Basically, the 401(k) participants who answered more questions correctly earned substantially higher returns in their 401(k). And I mean substantially. Those who got four or five of the five questions right had annualized risk-adjusted returns of 9.5% on average compared with 8.2% for those who answered only one or none of the questions correctly. That 1.3-percent-a-year margin, the researchers note, would translate to a 25% larger nest egg over the course of a 25-year career. That could be the difference between scraping by in retirement versus living a secure and comfortable lifestyle.

But while the 401(k)s of participants with greater knowledge didn’t outperform the accounts of their less knowledgeable peers because of some arcane or sophisticated investing strategy. The secret of their success was actually pretty simple (and easily duplicated): They invested more of their savings in stock funds than their financially challenged counterparts. And even when less-informed participants did venture into stocks, they were less apt to invest in international stocks, small-cap funds and, most important to my mind, less likely to own index funds, the option that has the potential to lower investment costs and dramatically boost the value of your nest egg.

The better-informed investors’ results come with a caveat. Even though more financially savvy participants earned higher returns after accounting for risk, their portfolios tended to be somewhat somewhat more volatile (which isn’t surprising given the higher stock stake). So they had to be willing to endure a somewhat bumpier ride en route to their loftier returns.

I’d also add that while more exposure to stocks does generally equate to higher long-term returns, no one should take that as an invitation to just load up on equities. When investing your retirement savings, you’ve also got to take your risk tolerance into account as well as the effect larger stock holdings have when the market heads south. That’s especially true if you’re nearing retirement or already retired, as portfolio heavily invested in stocks could suffer a setback large enough to force you to seriously scale back or even abandon your retirement plans.

Mastering the Basics

Ready to see how you’ll fare on the study’s Financial Knowledge test? The five questions and correct answers are below, followed by my take on the lessons you should from this exercise, regardless of how you score.

Question #1. Suppose you had $100 in a savings account that paid 2% interest per year. After five years, how much would you have in the account if you left the money to grow?
a. More than $110
b. Exactly $110
c. Less than $110

Question #2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today

Question #3. Is this statement true or false? Buying a single company’s stock usually provides a safer return than a stock mutual fund.
a. True
b. False

Question #4. Assume you were in the 25% tax bracket (you pay $0.25 in tax for each dollar earned) and you contributed $100 pretax to an employer’s 401(k) plan. Your take-home pay (what’s in your paycheck after all taxes and other payments are taken out) will then:
a. Decline by $100
b. Decline by $75
c. Decline by $50
d. Remain the same

Question #5. Assume that an employer matched employee contributions dollar for dollar. If the employee contributed $100 to the 401(k) plan, his account balance in the plan including his contribution would:
a. Increase by $50
b. Increase by $100
c. Increase by $200
d. Remain the same

The answers:

1. a, More than $110. This question was designed to test people’s ability to do a simple interest calculation. To answer “more than” instead of “exactly” $100, you also had to understand the concept of compound interest. (Percentage of people who answered this question correctly: 76%.)

2. c, Less than today. This question gets at the relationship between investment returns and inflation and the concept of “real” return. To answer it correctly, you must understand that if your money grows at less than the inflation rate, its purchasing power declines. (92%)

3. b, False. Here, the idea was to test whether people understood that a stock mutual fund contains many stocks and that investing in a large group of stocks is generally less risky than putting all one’s money into a the stock of a single company. (88%)

4. b, Decline by $75. This question gauges people’s understanding of the tax benefit of a pretax contribution to a 401(k) and its effect on the paycheck of someone in the 25% tax bracket. (45%)

5. c, Increase by $200. This was simply a test of whether people understood the concept of matching funds and the effect of a dollar-for-dollar match. (78%)

Average score: 3.8 All 5 correct: 33% All 5 wrong: 2%

Okay, so now you know how you stack up compared with the 401(k) participants in the study. But whether you did well or not, remember that your performance on this or any other test isn’t necessarily a prediction of how your retirement portfolio will fare. Very financially astute people sometimes make dumb investment moves. Sometimes they try to get too fancy (think of the Nobel Laureates whose hedge fund lost billions in the late ’90s). Other times there may be a disconnect between what people know intellectually and how they react emotionally.

Nor does a lack of financial smarts inevitably doom you to subpar performance. You don’t need a PhD in finance to understand the few basic concepts that lead to financial success: spreading your money among a variety of investments instead of going all-in on one or two things, keeping costs down and paying attention to both risk and return when investing your savings.

So by all means take the time to educate yourself about investing. But don’t feel you have to go beyond a few simple but effective investing techniques to earn competitive returns and improve your chances of a secure retirement.

More from RealDealRetirement.com:

Can I Double My Nest Egg In the Final Years of My Career?

How To Save On Retirement Investing Fees

How To Build A $1 Million IRA

MONEY 401(k)s

The Big Flaws in Your 401(k), and How to Fix Them

Falling Short book cover

Badly designed 401(k) plans are a key reason Americans are headed towards a retirement crisis, a new book explains. Here are three moves that can help.

Every week seems to bring a new study with more scary data about the Americans’ looming retirement crisis—and it’s all too easy to tune out. Don’t. As a sobering new book, Falling Short, explains, the crisis is real and getting worse. And if you want to preserve your chances of a comfortable retirement, it’s time to take action.

One of the most critical problems is the flawed 401(k) plan, which is failing workers just as they need more help than ever. “The dream of the 401(k) has not matched the reality,” says co-author Charles Ellis. “It’s turned out to be a bad idea to ask people to become investing experts—most aren’t, and they don’t want to be.”

When it comes to money management, Ellis has plenty of perspective on what works and what doesn’t. Now 77, he wrote the investing classic Winning the Loser’s Game and founded the well-known financial consulting firm Greenwich Associates. His co-authors are Alicia Munnell, a prominent retirement expert who heads the Center for Retirement Research at Boston College, and Andrew Eschtruth, the center’s associate director.

What’s wrong with the 401(k)? For basic behavioral reasons, workers consistently fail to take full advantage of their plans. Most enroll, or are auto-enrolled, at a low initial savings rate, often just 3% of pay— and they stay at that level, since few plans automatically increase workers’ contributions. Many employees borrow money from their plans, or simply cash out when they change jobs, which further erodes their retirement security. Even if investors are up to the task of money management, their 401(k)s may hamper their efforts. Many plans have limited investing menus, few index funds, and all too often saddle workers with high costs.

When you add it up, investor mismanagement, along with 401(k) design and implementation flaws, have cost Americans a big chunk of their retirement savings, according to a recent Center for Retirement Research study. Among working households headed by a 55- to 64-year-old, the median retirement savings—both 401(k)s and IRAs—is just $100,000. By contrast, if 401(k)s worked well, the median amount would have been $373,000, or $273,000 more. As things stand now, half of Americans are at risk of not being able to maintain their standard of living in retirement, according to the center’s research.

Can the 401(k) be fixed? Yes, the authors say, if employers adopt reforms such as auto enrollment, a higher automatic contribution rate, and the use of low-cost index funds. But even those changes won’t end the retirement crisis—after all, only half of private sector workers have an employer-sponsored retirement plan. Moreover, Americans face other economic challenges, including funding Social Security, increased longevity, and rising health care costs.

To address these problems, authors discuss possible policy changes, such as automatic IRAs for small businesses and proposals for a new national retirement plan. Still, major reforms are unlikely to happen soon. Meanwhile, there’s a lot you can do now to improve your odds of a comfortable retirement. The authors highlight these three moves to get you started:

Aim to save 14%: The best way to ensure that you actually save is to make the process automatic. That’s why few people consistently put away money without help from a company retirement plan. If you save 14% of your income each year, starting at age 35, you can expect to retire comfortably at age 67, the authors’ research shows. Start saving at age 25, and put away 12%, and you may be able to retire at 65. If you get a 401(k) matching contribution, that can help your reach your goal.

Choose low-cost index funds. One of the smartest ways to pump up your savings is to lower your investment fees—after all, each dollar you pay in costs reduces your return. Opt for index funds and ETFs, which typically charge just 0.2% or less. By contrast, actively managed stock funds often cost 1.4% or more, and odds are, they will lag their benchmarks.

Adjust your goals to match reality. You 401(k) account isn’t something you can set and forget. Make sure you’re saving enough, and that your investments still match your risk tolerance and goals—a lot can change in your life over two or more decades. The good news is that you can find plenty of free online calculators, both inside and outside your plan, to help you stay on course.

If you’re behind in your savings, consider working a few years longer if you can. By delaying retirement, you give yourself the opportunity to save more, and your portfolio has more time to grow. Just as important, each year that you defer your Social Security claim between the ages of 62 and 70 will boost the size of your benefit by 8% a year. “You get 76% more at age 70 than you will at age 62,” says Ellis. If working till 70 isn’t your idea of an dream retirement, then you have plenty of incentive to save even more now.

More on 401(k)s:
Why Millennials are flocking to 401(k)s in record numbers
Why your 401(k) may only return 4%
This Nobel economist nails what’s really wrong with your 401(k)

MONEY retirement planning

Americans’ Top 3 Excuses for Not Saving—and Why They Don’t Hold Up

Getting paid in peanuts
Rodolfo Arguedas—iStock

Truth is, most Americans can save more than they are doing right now. Here are three ways to make sure you reach your retirement goals.

Saving money is tough. So it’s no surprise that we come up with all sorts of reasons we just can’t save as much as we should. But are these legitimate excuses, or rationalizations? To see, I checked out the section of BlackRock’s 2014 U.S. Investor Pulse Survey that deals with reasons people find it difficult to save scrutiny.

When BlackRock, the world’s largest asset manager, polled a representative sample of 4,000 Americans earlier this year as part of its second annual look into financial behavior and retirement readiness, the findings weren’t exactly a revelation. Pre-retirees on average have accumulated a nest egg large enough to generate only about 15% of their desired retirement income, and even affluent pre-retirees (those with investable assets of $250,000 or more) came up short by roughly 50%.

Clearly, people just aren’t saving enough to give themselves a solid shot at a secure retirement.

To get at the question of why, the BlackRock survey queried people about a variety of financial obstacles that can interfere with building a retirement nest egg. Below are the three impediments that were cited most often, ranked by the percentage of respondents who identified each and followed by my advice on how to bolster your saving efforts.

1. “I don’t earn enough.” (47%)

There are some people whose incomes, unfortunately, are so low that every cent goes to living expenses, leaving nothing to save. And it’s also true that earning a higher salary, in theory at least, may be able to give you more wiggle room in your budget, making it easier to save.

But once you’re beyond the “scraping by” stage, the level of your income isn’t the deciding issue when it comes to saving. Witness the fact that 21% of affluent investors queried for the BlackRock survey also claimed that not earning enough made it hard for them to save. So for most of us, saving comes down to a choice: how much of our income we’re willing to set aside for a distant tomorrow vs. how much we prefer to spend on ourselves today. Given that we’re largely hard-wired for immediate gratification, all too often we go with spending over saving.

So how can we tilt the odds more in savings’ favor? One way is actively seek out opportunities to save. But a more effective strategy is to put your savings on autopilot by committing, say, 10% to 15% of your salary to a 401(k) or automatic investing plan. That way, you won’t have to constantly make a conscious decision to save, which, alas, too often ends up being a decision not to save.

2. “The cost of living is too high.” (46%)

The problem with this statement is that implies that the cost of living is a given, a financial fact of life over which we have absolutely no control. But this isn’t quite true.

Granted, we don’t have the power to set the prices for houses, cars, utilities, food and other goods and services. But we do have considerable maneuvering room when it comes how much we spend on many of these things. We can choose to live in a modest house or in a less expensive part of town (or, for that matter, a city with lower living expenses). We can drive an economy car rather than a Statusmobile. And we can certainly cut the percentage of our budget that goes toward food and entertainment by eating out less often or being more creative about how we spend our leisure time.

In fact, if you follow my suggestion above and allocate 10% to 15% of your income to saving right off the top, you’ll effectively force yourself to make these sorts of lifestyle compromises, as one way or another you’ll have to make due with the 85% or 90% of income you have left after your savings have been automatically deducted from your paycheck.

3. “I have unplanned expenses.” (33%)

This isn’t a bogus excuse. But let’s be realistic. We all know that life doesn’t unfold as predictably as a spreadsheet. So unexpected bills always have and always will be a part of financial life. So while we may not know exactly what these expenses will be or when they’ll appear, we know that some outlay we haven’t planned for—home and auto repairs, health-care costs, whatever—will arise at some point in the future.

If anything that fact should give us even more motivation to save. Why? Because creating a financial cushion can help us better absorb the unanticipated expenses we know will pop up sooner or later (usually sooner, it seems) and make it less likely that these unwelcome demands on our budget will wreak financial chaos.

I certainly don’t want to underestimate these and other obstacles most people face when it comes to saving for retirement. They can be daunting, and overcoming them can require real sacrifice.

But unless you’re okay with having your Social Security benefits determining your standard of living or you don’t mind running out of money before you run out of time, it’s important to find a way to rise to the challenge.

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MONEY Longevity

Americans Are Living Longer Than Ever. And That May Kill Your Pension

With more workers likely to reach age 90, employers will have to step up their pension funding. Or, more likely, hand you a lump sum instead.

For the first time, both boys and girls born today can expect to see at least 90 years of age, according to revised mortality tables published on Monday by the Society of Actuaries. This represents a staggering extension of life over the past century. In 1900, newborns could not expect to see what is now the relatively youthful age of 50. But a big question looms: how we will pay for all these years?

In the last 100 years, the drumbeat of extended life expectancies has been interrupted during World War I and again during the Great Depression, but only fleetingly in any other period. Medical science and greater attention to health and nutrition have stretched lifetimes by a year or more every decade. In the new tables, newborn boys are expected to reach exactly 90 years of age—up from 87 in the last published tables in 2000. Girls are now expected to reach 92.8—up from 87.3.

This extraordinary expansion has changed every phase of human life. Only a few generations ago childhood came to an abrupt halt at ages 13 or 14, when boys went to work and girls married and started families. As lifetimes expanded, the teen years emerged and kids were kids longer. They went to high school and then to college. Today, the years of dependence have stretched even longer to 28 or 30 in a period recently defined as emerging adulthood.

Middle age and old age have also stretched out. Half a century ago reaching age 65 meant automatic retirement and imminent infirmity. Today, millions of 65-year-olds aren’t just in the workforce—they are reinventing themselves and looking for new pursuits, knowing they have many good years ahead.

According to the revised tables, which measure the longevity of those who hold pensions or buy annuities, a man at 65 can expect to live to 86.6—up from 84.6 in 2000. A woman at 65 can expect to live to 88.8—up from 86.4 in 2000. In another 15 years the typical 65-year-old will be expected to reach 90. And these are not necessarily years of old age; for many, most of these extra years will be lived in relatively good health.

What is good news for humanity, though, sends tremors through the pension world. Every few extra years of life expectancy come with a price tag. Already, many private and public pension funds are woefully underfunded—and the new tables essentially mean they are even further behind. Aon Hewitt, a benefits consultant, estimates that the new figures add about 7 percentage points to the amount a typical corporate pension must set aside.

So a typical pension that has only 85% of the funds it needs based on the old mortality rates now has only 78% of what it needs based on the new rates. This will almost certainly lead to a further erosion of individuals’ financial safety nets as pension managers try to figure out how to fill the holes. Already the majority of large companies have frozen or changed their pension plans in order to reduce their financial risk, while shifting workers to 401(k)s. Look for more employers to abolish their traditional pensions and to offer workers a lump sum settlement rather than remain on the hook for unknown years of providing guaranteed income.

“As individuals receive lump sum offers, they need to understand that their life expectancy is now longer,” says Rick Jones, senior partner at Aon Hewitt. “They need to be able to make the money last.”

Companies probably will have until 2017 before regulators require them to account for the new mortality rates, Jones says. That means, all things being equal, lump sum payments will be higher in a few years. For those on the verge of taking their benefits, it might make sense to wait. Public pensions, which generally are in worse shape than private pensions, will have to account for longer lives as well, though they are not subject to the same regulations and the adjustments will come slower.

The new figures also promise to speed changes in the 401(k) world, where both plan sponsors and plan participants have been slow to embrace annuities, which are insurance products that turn savings into guaranteed lifetime income. Savers have generally avoided certain annuities because they are seen as expensive and leave nothing for heirs. Lacking demand and facing legal hurdles, employers have also shied away.

Yet policymakers and academics have been arguing for a decade that 401(k) plans need to provide a guaranteed income option. The U.S. Treasury has been pushing the use of longevity annuities in 401(k)s, recently issuing guidelines for their use in target-date retirement funds. With a longevity annuity, also known as a deferred income annuity, you can buy lifetime guaranteed payout for a relatively small amount and have it kick in at a future date—say, age 80 or 85. And these days, even that’s not all that old.

Read next: You May Live Longer Than You Think. Here’s How to Afford It

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