Millions of Americans are not doing enough to prepare financially for retirement, a variety of studies warn.

A Fidelity retirement index released last summer indicated the typical working American household has saved only $18,750 for retirement and is expecting to cover most retirement expenses through Social Security and pension benefits.

" … Americans are relying heavily on Social Security and employer pensions and are only saving a small percentage of their personal income to fund their retirements," said Jeffrey Carney, president of Fidelity Personal Investments, in a prepared statement. "What this means, in effect, is that many Americans will take a significant pay cut in their retirement years, making it difficult for them to adequately prepare financially for rising retiree medical costs and longer anticipated life spans."

The index measured retirement readiness based on a survey of more than 1,900 American households.

Another study by Hewitt Associates found that many workers participating in company 401(k)s "cash out" when they leave their jobs.

The study of nearly 200,000 workers with 401(k)s found that 45 percent cashed out when separating from a company. The rest either kept their savings in the current employer's 401(k) plan or rolled the money over into an Individual Retirement Account or other retirement plan.

"Our findings show that too many workers are not looking at their 401(k) savings as long-term in nature, but are instead using termination of employment as an opportunity to spend their money," Lori Lucas, director of participant research at Hewitt, said in a press release. "With fewer workers tending to remain at one company until retirement, employees may become 'serial consumers' of their 401(k) savings, which can have serious consequences when it comes to their ultimate ability to reach their retirement goals."

The study found that younger workers were more likely to cash out than older workers. Even so, more than 42 percent of workers age 40-49 cashed out of their 401(k) plans upon leaving a job.

Small accounts were most likely to be cashed out. Nearly three-fourths of workers took the money when the account balance was under $10,000.

The Hewitt analysis did not determine why workers decided to take their 401(k) money, or how the money was actually spent.

In addition to losing retirement income in later life, early withdrawals mean hefty financial consequences in the form of taxes and penalties.

As fewer companies provide traditional pension plans, saving for retirement through 401(k) plans and IRAs becomes increasingly important.

But in their book, "Coming Up Short: The Challenge of 401(k) Plans," Alicia Munnell and Annika Sunden of the Center for Retirement Research at Boston College found the typical household approaching retirement age in 2001 had 401(k) or IRA holdings of only $55,000 - an amount that would generate about $300 per month for a retired couple.

From 1986 to 2000, the authors also found that traditional pensions earned a better rate of return than 401(k) style plans - 7.9 percent compared to 7.1 percent.

Women in particular can find themselves at risk later life. Social Security is frequently the dominant, and in many cases only, source of retirement income for an elderly woman, according to the AARP.

Rising health-care costs raise questions about the adequacy of retirement income and just how long people will have to work, Tom Gallagher, manager of the Wyoming Department of Employment, Research and Planning Section, said.

During the 1990s, people coming of age frequently left the state. So by and large, the state's population has been aging.

As a result, there is a dearth of succession workers. Gallagher said to the extent baby boomers stay on the job longer because they can't afford to retire, the problem will be exacerbated.

In terms of benefits, Gallagher said the larger the firm, the greater the likelihood it will offer more complex benefits like 401(k) plans.

It's more likely that workers in small firms, and in industries with high turnover and high percentages of nonresident workers, wouldn't even have access to such plans, he said.

Business Editor Tom Mast can be reached at tom.mast @casperstartribune.net, or call 307-266-0574.

What is a 401(k) plan?

A 401(k) plan is an employer-sponsored qualified retirement saving plan. It allows a worker to save for retirement while deferring immediate income taxes on the money saved or the earnings until withdrawn.

It is named for a section of the 1978 Internal Revenue Code.

A 401(k) must be sponsored by an employer, but a self-employed person can set one up as well.

When an employee leaves a job, the account generally remains active for life, although the accounts must begin to be drawn out beginning at age 70 and a half.

If a worker takes a new job, he or she can roll over an existing 401(k) into a new account hosted by the new employer, or into an Individual Retirement Account (IRA).

Source: Wikipedia