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The New Retirement Standard


Unless automatic enrollment in 401(k)s and other defined contribution plans becomes universal and savings deferral rates increase substantially, people are going to have significant shortfalls in their retirement nest eggs.

The general consensus: workers need to put away at least 15% and possibly 25% or more of their salaries now, to be ready and able to retire when they get past age 65.

Even if 401(k) savings rates improve, the strains of longevity, rising healthcare costs and inflation will put a majority of senior citizens at risk of outliving their money.

This will inevitably redefine retirement, making it necessary for many to work at least part time into their 70s.

This was the ominous warning of speakers on the "Insights from Worldwide Private Pension Systems" panel at the Investment Company Institute's 2011 General Membership Meeting in Washginton on May 6.

Countries are beginning to take steps in the right direction, but change is slow. In America, 76% of workers are saving for retirement, noted Cynthia Egan, president of retirement plan services at T. Rowe Price. However, 37% of American families will face a shortfall, she said.

Australia appears to be headed down the most secure retirement savings path, thanks to the "superannuation" requirement that forces Australian workers to set aside 9% of their salaries for retirement.

The Australian savings rate started in 1992 at 3%; now the government plans to increase it to 12%, noted Maria Wilton, managing director of Franklin Templeton Investments Australia.

The U.K. is a bit further behind the U.S., in that its "pension system resembles the U.S. system but is a little more complex and less generous, and reform efforts are just beginning to be underway," said David W. Powell, a principal with Groom Law Group, Chartered.

However, by 2012 all large employers must offer either a defined benefit, defined contribution or stakeholder pension plan, he said. By 2016, this will be required of all employers. Also, automatic enrollment will roll out next year with 1% mandated contributions, rising to 8% in 2016.These are all positive steps, but the timetable is painfully slow. As Peter DeProft, director general of the European Fund and Asset Management Association, put it, "This will be the first time a generation since World War II will not have the same standard of retirement living as their parents."