Tom Murphy
RedwoodAge.com

Corn is up 66 percent this year, and gas prices rose 46 percent in the last six months. But a new study warns it's soaring medical costs that will leave most boomers far short of cash after they retire.

Longer life spans, fewer pensions and tighter medical benefits are reducing the ability of most people to maintain their standard of living after they stop working, according to Hewitt Associates, a human resources consultant.

How much cash is needed? The firm estimates employees will need to replace 126 percent of their last paycheck to maintain their standard of living - far more than the 70 to 90 percent that has been the traditional rule of thumb in retirement planning. 

In a survey of almost 2 million workers at 72 large US companies, the study found only one in five was on track to meet that goal. On average, workers will replace only 85 percent of their salary.

And even that estimate makes some pretty fantastic assumptions, including:

• Inflation will average 3 percent, which is roughly 1 percent less than the current rate;
• The typical 40-year-old earns $83,000 a year; and
• Employees set aside 8 percent of their earnings for retirement.

Try Harder
The firm suggests that workers need to do better, starting with more savings. Harris says workers, who start saving early, can meet their needs if they put away 10 percent of their salary and keep working until age 67 instead of retiring at age 65.  

"Full-career employees who actively save in their 401(k) plans from an early age and have both pension plans and subsidized retiree medical coverage are in good shape for retirement, but employees in this situation - or who will be in this situation in the future - are a very small minority," said Alison Borland, a defined contribution consultant. "Without changes in behavior, most workers will either need to significantly reduce their spending or work longer in order to have enough to last through retirement."

The firm has a few tips for planning better. First, plan to live longer - about 10 years longer than the expected lifetime of 84 for someone who is 65. Second,  participate fully in 401(k) plans instead of leaving matching contributions from employers sitting on the table. Third, watch out for fees; for a younger worker, a 0.25 percent difference in fees can rob almost 6 percent from post-retirement income levels. Finally, consider target-date funds that deliver maximum income when you plan to retire.

"When employees learn how much they need to save in order to maintain a comfortable standard of living in retirement, the numbers seem overwhelming and unattainable," said Borland. "But small, incremental changes to saving and investing habits can truly have a big impact."