You'll Need to Save More

Even before the onset of the worst financial crisis since the Great Depression, many individuals wondered whether they were saving enough for retirement. Frankly, many weren't. Now, post-meltdown, the question remains: Am I saving enough? If not, what can I do about it?

Start with the assumption that you will need to replace about 85% of your preretirement income from a combination of savings and Social Security. If you expect income from other sources -- perhaps a pension or part-time work -- or if you plan to pay off your mortgage before retirement, your replacement target may be lower.

Next, divide the amount you have already saved for retirement by the current income from your job. If you earn $50,000 per year, for example, and you have saved $100,000 so far, your retirement savings-to-salary ratio is 2. Compare it to the ratios below. If you're 40 years old, congratulations, you're on track for a secure retirement. But if you're 45 or older, you've got some catching up to do. Ideally, if you plan to retire at 65, your combined savings and investment earnings should equal more than ten times your final salary.

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The table assumes you are saving 13% of your gross income, including any employer contributions, and that your wages grow by 4% per year (meaning your contributions would increase along with your salary). It also assumes that Social Security will replace about 40% of your earnings. That's true if you earn about $50,000 a year, but for higher-wage earners, Social Security will replace a smaller portion of preretirement income, so you may need to save more than the target ratios suggest.

If your account balance isn't what it should be, it's time to make some changes. Focus on the three factors you can control: how much you save, how long you work and how much money you spend in retirement.

Younger workers have the most to gain from increased savings because they have more years for those savings to accumulate and for compound interest to work its magic. And because your 401(k) contributions escape federal and state income taxes (but not FICA taxes), the pain in your paycheck may not be as bad as you fear.

Let's say you're 30 years old, single, earn $30,000 a year and contribute 4% ($1,200) of your gross salary per year to your 401(k) plan. Your employer matches 50% of your contribution on the first 8% of salary. If you boost your deferral rate to 8%, you would double your contributions from $1,200 to $2,400 per year, but you would reduce your take-home pay by just $17 per week, assuming a combined federal, state and local tax rate of 25%. Plus, you'd capture the full company match.

Although many workers fail to contribute enough to their retirement plans to capture the full employer matching contribution, nearly 90% of respondents in a recent survey conducted by ING U.S. Retirement Services admitted that they could save more. "Americans today understand that they shoulder a greater responsibility for securing their own retirement," says Rob Leary, chief executive officer of ING Insurance U.S. "People must find ways to contribute more to their retirement accounts."

So, where do you find room in your budget to increase your savings? Consider cutting back on some luxuries, such as a daily latte or a pricey car, to fund a more comfortable retirement. Saving an extra $70 per month -- about equal to the $17-per-week reduction in take-home pay from our example -- would add more than $160,000 to your nest egg in 35 years, when you're 65, assuming an average investment return of 8% per year.

Investors in their late fifties who are behind in their savings may find that increasing the amount of money they sock away is not enough. But other changes -- such as delaying retirement and reducing expectations of how much you can afford to spend when you get there -- have a greater potential impact.

Your target savings rate

Want to maintain your current lifestyle in retirement? to see whether you are saving enough, multiply the target savings number below by your salary. If your balance is less than the target, consider spending less now and banking those savings to create a higher income later.

Age: 30 -- % Savings Factor: 0.3

Age: 35 -- % Savings Factor: 1.1

Age: 40 -- % Savings Factor: 2.0

Age: 45 -- % Savings Factor: 3.2

Age: 50 -- % Savings Factor: 4.5

Age: 55 -- % Savings Factor: 6.2

Age: 60 -- % Savings Factor: 8.2

Age: 65 -- % Savings Factor: 10.6