The 401(k) is enjoying a wee bit of a corporate comeback.

Fidelity Investments, which says it's the leading provider of workplace retirement savings plans in the US, disclosed Thursday morning that some of the companies which reduced their financial contributions to 401(k) plans during the financial meltdown have started ponying up money again, or at least plan to. More

It looks like the end of the American retirement dream as we know it. The 77 million baby boomers who are heading into their golden years with shattered nest eggs may prove to be the first generation in modern U.S. history to have less retirement security than their predecessors.

The numbers tell the story. For older workers, those ages 55-64, nearly 30% had no personal retirement savings — zip, nada — according to a recent analysis by benefits consultants Watson Wyatt, which reviewed data from the 2007 Survey of Consumer Finances (the most recent available). Those non-savers were mainly low-income households, but even among middle- and upper-income groups, retirement wealth was "generally inadequate," say the consultants.

Worse, only an elite 15% of households of any income level had saved the equivalent of at least four times earnings. And even that level of savings will probably not be enough to support you without a drastic downgrade in lifestyle. Say you are a 65-year-old who has saved four times your $100,000 salary, or $400,000. To reduce your chances of outliving that money, you should count on withdrawing only between  4% to 5% of that amount each year, or $16,000 to $20,000.  (To see how much you need to save for retirement, cnnmoney.com's retirement calculator can give you a rough idea.)

Social Security boosts that income, but the higher your salary pre-retirement, the less it helps afterward. For the lowest-paid individuals, according to one study, Social Security replaces 71% of income; for the highest-earning workers, it replaces only 31%. If you're the 65-year-old retiree in our example, a simple Social Security calculator estimates you'll receive $24,000 a year in benefits; adding in withdrawals from savings brings your income to around 40% to 44% of the pre-retirement level. Not all that retirement income is taxable, but it's still a big drop. And remember that Watson Wyatt's estimate of people's retirement savings is based on 2007 wealth levels; the recent market downturn has undoubtedly reduced the ranks of households that are successfully saving for retirement. (To get an estimate of your Social Security income, try this tool.)

All of which makes retirement security a critical issue that the Washington has yet to confront. Right now President Obama is grappling with a stalled health care plan and controversial financial reforms, among other issues. But judging by the one measure he has put forward, he seems to support only incremental change: His  automatic IRA plan would require employers that don't currently offer a retirement plan to automatically enroll workers in an IRA. (They could opt out.)

But that proposal doesn't address the real causes of the crisis, according to many economists, who say do-it yourself  plans like 401(k)s and IRA burden investors with too much risk and fail to deliver reliable retirement income. Some recommend crafting a universal retirement savings plan instead that would spread risk and responsibility among workers, employers and the government.

Even many supporters of the current system urge broader reforms. Says Christian Weller of the Center for American Progress: "The three-legged stool of retirement — public pensions, employer pensions and individual savings — is still intact, but it does need to be strengthened." He suggests more automatic features individual retirement accounts that would make them look more like pensions, as well as offering incentives for workers to stay on the job longer.

Clearly, given the pace of change in Washington, any major reforms, if they ever happen, are a long way off. Meanwhile, would-be retirees will need to save as much as they can and work longer they planned. That doesn't bode well for the American retirement dream.

What do you think should be done to rescue the retirement?

In its most recent survey of corporate pension accounting, Hewitt reports that the average assumed long-term rate of return at year-end 2008 is 7.98%.  That’s the number that companies estimate they'll earn annually on their pension investments; they use that guess to help decide how much they must invest today to pay future benefits. While  7.98% is  lower than the 8.34% assumed rate in 2004, it  still seems a tad optimistic when viewed through “new normal” binoculars. Stocks aren’t expected to earn much more than 8%, and there’s little reason to expect bonds will post returns beyond their 5% historical long-term average. (In fact, given where we are in the interest rate cycle, 5% might be optimistic.)

Even before the credit crisis fallout, there was plenty of skepticism about corporate pension assumptions. In the 2007 Berkshire Hathaway shareholder letter Warren Buffett stepped through yet another of his clear-eyed market/math lessons that pointed out the long-term trend is for stocks (net of expenses) to earn around 7% and bonds 5%.  Plug that into a 70/30 stock-bond mix (typical for pension funds) and you get a return closer to 6.5% than 8%.

I am going to leave the world of pension funding/underfunding and switch gears to what matters more for many of us: The rate of assumption we have for our self-managed 401(k) and IRA retirement assets. After  all, most of us aren’t covered by traditional pensions. And that leads me to ask the question: What’s your assumed rate of return? (See the poll below.)

Beware of the “garbage in, garbage out” trap. The higher the rate you use, the higher the risk you run of falling short. First off, there's the problem of high expectations falling short of real-world returns. Second, when you assume a high rate of return it often becomes an excuse to contribute less. And to be sure, after the 18% annualized gain for the S&P 500 in the 1990s it was easy to assume the markets would do most of the heavy lifting for our retirement.

Consider how different rates of return would impact a $250,000 retirement portfolio today. (Assume no additional contributions.)

In 15 years, the $250,000 would be worth:

•    $2.99 million @ 18% assumed rate.
•    $1.04 million @ 10% assumed rate
•    $793,000  @ 8% assumed rate
•    $643,000 @  6.5% assumed rate

So, what rate are you banking on? To see the impact of different assumptions, check out this calculator where you can adjust your contributions and assumed rate of return. And keep in mind the advice of Steve Utkus, chief of Vanguard’s Center for Retirement Research:  “Contributions need to be higher than many of us imagined. Markets, averaged out over good and bad periods, are now recognized to play a smaller role.” Are you ready to pony up more?

Convert some of your retirement savings into a lifetime annuity and you could snag a big tax break, if a new bill recently introduced in the House sees the light of day.

The rationale behind the Retirement Security Needs Lifetime Pay Act (H.R. 2748) is that we are going to screw up withdrawals from our retirement accounts and run out of money way too soon. Indeed, more than 40% of respondents to a MetLife survey said a 10% annual drawdown of their retirement savings seemed on target. But that aggressive pace would deplete your retirement funds in under 10 years; given longer life expectancies, it's prudent to aim for a retirement income stream running for at least 20 years, and preferably 30. (In fact, the universally accepted initial annual withdrawal rate to ensure your money will last as long as you, is 4%.)

So that brings us to the new legislation introduced by Reps. Earl Pomeroy (D-N.D.) and Ginny Brown-Waite (R-Fla.) that holds out a nice tax carrot to get us to convert some of our lump sums into annuities that will provide a lifetime income stream. The idea is to get us to  create our own old-fashioned pension plans that deliver steady payouts. Key provisions of the bill include:

•    You will be allowed to exclude 50% of annual annuity payouts from a non-qualified plan (one you invested after-tax dollars in) from taxable income. The annual maximum exclusion would be $10,000.
•    You will be allowed to exclude 25% of annual annuity payouts from a qualified plan (401(k), IRA and other tax-deferred accounts) from taxable income.

The bill also creates a tax incentive to purchase longevity insurance, an annuity usually structured so it doesn't start paying out until you're in your eighties. (In return for that delay of gratification, you get higher annual payments than you would from annuities that start paying earlier.)

In 2005 Pomeroy floated a similar idea (the more catchily-named Lifetime Pension Annuity for You Act) that never made it out of committee. But that was long before retirement security was threatened by a severe bear market and the bursting of the real estate bubble.  And according to academics who studied the 2005 version, the tax breaks would help to reduce the cost of annuities (by getting more folks to buy ‘em) and wouldn’t be a huge hit for Treasury’s coffers. Then again, back when the study was conducted we didn’t have massive deficits to pay for, so any hit to future tax revenue may be a tough sell in Congress today.

And what about you? Would a tax break entice you to consider converting some of your retirement savings into an fixed annuity?

Whether or not the 401(k) is the nation's best-designed retirement savings vehicle, for most people, it’s the only retirement plan they’ve got. Unfortunately, the most compelling feature about the 401(k) — the matching contribution from your employer — is disappearing fast. To save money, one-quarter of U.S. employers have eliminated matching contributions to employee 401(k) retirement plans since September, according to a recent survey of senior finance and HR executives by CFO Research Services and Charles Schwab.

Just how much does a company save by eliminating that benefit? Hewitt Associates ran the numbers in an April survey. For a company doing the typical match (50 cents for every dollar an employee contributes up to 6% of pay), the cost savings is about $1500 per worker.  That can add up to a lot — anywhere from $2 million for a small company to $25 million for a large firm, Hewitt says.

This isn’t a new play. In past downturns, companies have been quick to cut their 401(k) matching contribution and have later restored the benefit when the economy improves. But that move takes a big toll on workers’ bottom lines at a time when they can least afford to take another hit to their retirement savings. Even a short-term halt in that contribution can have a long-lasting negative effect on your retirement savings. That’s because once the match is suspended, many employees reduce their own 401(k) contributions or even stop contributing to their plan entirely. As a result, employees' retirement savings shrink by thousands of dollars. For example, younger workers earning $50,000 a year who contribute 6% of their salary will have $16,000 less for retirement than what they would have had if their employer hadn't suspended their match for one year. That loss jumps to $48,000 if employees stops contributing during that year as well. While they may eventually start saving in their 401(k) again, Hewitt finds even a hiatus in savings of just a few years can deplete retirement savings by hundreds of thousands of dollars. For example, a younger worker earning $50,000 a year who stops contributing 6% of his or her salary for five years can have up to $150,000 less for retirement.

Clearly, just because your employer no longer kicks in to your retirement plan doesn’t mean you should stop too. Remember, your 401(k) is still a pretty good deal even without a company match. You get a big tax advantage by putting pre-tax dollars away for retirement, which lowers your current taxable income. And you don’t pay taxes on the gains in your plan until you begin withdrawing the money at retirement, which effectively gives you a higher after-tax rate of return than if you were in a taxable investment account. Sure, you can get similar tax advantages with a Roth or deductible IRA but you can only sock away $5,000 a year with those. With a 401(k), you can save up to $16,500 pre-tax in 2009. You can’t discount the convenience of having your retirement investments taken directly out of your paycheck either.

As for your employer, Hewitt suggests some other actions for companies to take to cut costs before slashing their company matches, including shopping around for funds with the lowest expenses and getting rid of costly printed materials which duplicate information found on company  websites. For a thoughtful take on how 401(k) plans can be improved, read this piece by my colleague Penelope Wang.

Sometimes a great notion just doesn’t live up to its promise.

That’s certainly true for target-date retirement funds, which are all-in-one portfolios that automatically shift to grow more conservative by your retirement date. A staple of 401(k) plans—and the default option for most new  investors—many target funds underperformed badly in the market meltdown. The typical 2020 portfolio dropped 30% last year. Worse, many shareholders in 2010 funds, who were poised to retire, got hit with similar losses.

Question is, who’s going to fix target-date retirement funds, and how?

Cue the federal government. On June 18 a hearing on target-date funds will be jointly held by the Labor Department and the Securities and Exchange Commission, which may eventually lead to new rules for these investments.

According to SEC chairman Mary Schapiro, who laid out the agenda for the hearing before a House financial services subcommittee earlier this week, regulators will examine the different asset mixes held by target date funds, which led to widely varying results. Among  2010 funds, Schapiro noted, returns last year ranged from -3.6% to -41%. The SEC and Labor Dept. will consider "whether additional measures are needed to better align target-date funds' asset allocations with investor expectations,"  Schapiro said.

Regulators will  also look closely at whether a target-date fund’s name might be "misleading or confusing to investors," Schapiro said. Not that there’s much question about investor confusion. One recent survey (pdf) found that 62% of investors polled thought “investing in a target-date fund means you will be able to retire on the target date.”

That would seem an obvious conclusion. But instead fund companies assume you will keep your money in your target fund for another two or three decades after retirement, instead of cashing out immediately. So the funds often hold a large stake in stocks, anywhere from 40% to 70% of the portfolio, until the retirement date, only then downshifting to bonds and cash.

Why assume such a long investing timeline? For one thing, higher stock allocations enable  fund groups to tout better performance records, since historically (if not lately) stocks have  delivered higher returns than bonds. The strategy is also a way to make up for the poor savings habits of 401(k) participants, since many fail to contribute enough to build adequate nest eggs.

Of course, taking greater risks to chase higher returns can easily backfire—just look at last year. As one would-be hearing witness, Joseph Nagengast of Target Analytics, wrote in his comments to the SEC (pdf), “If a fund labeled 2010 is really targeted to ‘land’ at 2040, it should be re-labeled as a 2040 fund.” (You can read comments from other experts seeking to testify at the SEC's website.)

If any reforms do result from these hearings, they would likely focus on improved disclosure of target-date risks. But regulating asset allocation is more difficult. Even financial experts disagree about the proper portfolio mix of stocks, bonds and other investments. Will a government agency be a better judge?

Still, it's clear by now that these investing choices should not be left up to the fund companies that market target funds, or employers, who aren't financial experts. The best solution, as some 401(k) critics have pointed out,  would involve guidance from independent fiduciaries, whose only concern is the interests of the fund shareholders—perhaps a federal retirement board should take on the task, as Vanguard founder John Bogle has suggested (pdf).

Meantime, a few fund groups are seeking to get ahead of any federal regulations by making their own changes. Schwab announced last month that it was reducing the amount of stock held by its target-date funds. Its 2010 portfolio, for example, shifted from a 50% stake in stocks to 43%.  Other firms that have made similar fixes include Aim and OppenheimerFunds, according to Financial Research Corp.

It's a start.

Well, you already knew the bad news about your 401(k), but now we have some more specifics about the misery all around you: The median rate of return on 401(k) balances was negative 28.3% last year, according to a study released today by human-resources consulting firm Hewitt Associates. The average 401(k) balance dropped from $79,600 at year-end 2007 to $57,200 at the close of 2008.

Now for the good news: Getting burned by last year's trauma does not appear to have shaken people's belief that it's a good thing to save for retirement. Seventy-four percent of employees participated in their 401(k) plan last year, says Hewitt, roughly the number as did the year before.

And yet, and yet….People are losing their nerve at the margins. The average employee contribution rate last year, says Hewitt, was 7.4%, down from 7.7% the prior year. (In 2004 and 2005, the rate was 7.9%.) Meanwhile, mutual-fund-and-401(k) giant Fidelity–which earlier this year said that average retirement contributions, by dollar amount, had increased slightly in 2008–released numbers today indicating dropoffs in employer and employee contributions in the first quarter of 2009. On average, workers socked away $1,700 pre-tax dollars in their 401(k)s in the first quarter of the year, down 9% from the corresponding quarter one year earlier. Total contributions (that is, employee deposits and employer matches) amounted to $2,780, down 10% from one year earlier.

To what extent the falling dollar amount reflects lower salaries or lower contribution rates is unclear. But what is clear is that workers' allocations to equity are falling–not just because falling stock prices did it for them, but also because they're making the decision for themselves. Hewitt suggests that the biggest-volume days for trading out of stocks were the days that followed the market's biggest drops (averaging negative 4%). Stable-value funds experienced an 11% increase in asset allocation. The average percentage of 401(k) portfolios allocated to stock dropped to just 59%–the lowest figure since Hewitt began tracking that number in 1997. (In 2005, for purposes of comparison, the share in equities was nearly 68%.)

Of course, some of the pullback from stocks may reflect not a vain attempt at return-chasing (or return-fleeing), but a reasoned reassessment of one's risk profile. And some of the cutbacks in retirement savings may reflect not despair, but urgent current needs for cash. But if you've been cutting your retirement allocation and giving up on stocks, you might at least ask yourself the questions: If investing in stocks in your 401(k) was a great idea a year ago, isn't it even a better idea today, when stocks are a lot cheaper and you don't have the assets saved up that you used to?

For beleaguered investors in 401(k) retirement plans, the news keeps getting worse. Over the past year the typical plan participant has suffered a loss of anywhere from 20% to 35%. Now a growing number of employers are adding to their workers’ woes by cutting their 401(k) matching contributions. A recent survey by Spectrem Group found that 34% of U.S. employers had reduced or eliminated their matches since January 2008, and another 29% intend to do so over the next 12 months.

The Pension Rights Center, which keeps a running tally of companies that have cut their 401(k) matches, reports that more than 100 employers are on the list. Among the recent additions: J.P. Morgan Chase, Rockwell Automation, and—can you say irony?—the leading advocate for retirees, AARP.

From the employer’s standpoint, cutting the 401(k) match is a quick way to slash costs, and it’s a kinder alternative to laying off employees. But the long-term impact of the cuts threatens the retirement security of their workers, which in turn cast doubt on the future of the 401(k) plan. There are signs that 401(k) participants, once famous for their inertia in past economic downturns, have started to give up on their saving. Spectrem’s survey found that 20% of employees have lowered their contribution rates, and another 5% intend to do so over the next 12 months. Those that are continuing to contribute are taking fewer risks. According to the Hewitt Associates 401(k) index, some 80% of contributions are flowing to fixed-income investments, not stocks.

All of which will make it more difficult for plan participants to earn the returns they need to achieve a comfortable retirement—and for the 401(k) plan to deliver on its promise. A study by the Employee Benefits Research Institute found that it will take most older workers (those who have been at their job for 20 years or more) at least three years to recover their 2008 losses. That calculation assumes employees continue to hold stocks, earn returns of at least 5% annually, and continue to contribute to their plans. If the stock market returns zero for the next few years, it will take workers nearly five years to recover their losses.

The flaws of 401(k)s have come under sharp scrutiny in Washington. At a February hearing the Senate Aging Committee examined 401(k) target-date retirement funds, which posted surprisingly large losses, particularly for older workers who were seeking safety. “Despite their popularity, there are absolutely no regulations regarding the composition of target funds,” said committee chairman Sen. Herb Kohl (D.-Wi.). “With more and more Americans relying on 401(k)s and other defined contribution plans as their primary source for retirement savings, we need to make sure their savings are well-protected with strong oversight and regulation.” The House Education and Labor Committee has also held hearings on 401(k) plans—at the most recent one, committee chairman Rep. George Miller (D.-Calif.) labeled 401(k)s plans a “a high-stakes crap shoot.”

As the criticism mounts, some policy experts are seizing the opportunity to push for a new tier of savings plan designed supplement or replace the 401(k), which would provide a steady stream of retirement income. A flurry of proposals have already been issued, including one last month, backed several policy groups and Service Employees Union International. This latest plan calls for a universal retirement program that would mandate contributions from employers and employees, with the government subsidizing lower-income workers.

Will some sort of new retirement plan get any traction? Despite the 401(k)s shortcomings, major changes seem unlikely at the moment. Even President Barack Obama’s proposal for an automatic IRA, which would establish a simplified retirement plan for small business workers, is facing stiff resistance from the GOP and business interest groups. But if the stock market keeps sliding and the recession lingers on—and millions of baby boomers move into retirement without enough money to pay the bills—Washington is bound become more receptive to broader changes. For now, though, the only remedy for your beaten-down 401(k) is to somehow save a lot more.

– Penelope Wang

About one minute into any conversation with an academic or policy-type who studies the issue of retirement security these days you hear some version of this lament:

“It’s not that the 401(k) has failed, it’s that the 401(k) was never meant to be the primary retirement fund for Americans. It is being asked to do something it was never intended to do.”

Great. Now they tell us.

The problem, as the retirement pros see it, is that the 401(k) was supposed to be a supplemental retirement plan that would complement existing programs such as old-fashioned pensions. But in the nearly 30 years since the 401(k) was introduced it has increasingly become the go-to main retirement account. Traditional defined benefit pension plans are already on the endangered list, and many of those that remain are dangerously under-funded. As for Social Security…well, we all know that’s a balance sheet nightmare.

In that anemic company, the 401(k) looks downright robust. But as my colleague Penny Wang recently outlined in an illuminating tour through the 401(k) morass, it is rife with serious structural flaws.

It’s a topic that’s getting some face time in Washington. Tomorrow, February 24, the House Education & Labor Committee will hold a hearing on the Shortcomings of our Nation’s Retirement System. Then on Wednesday, the Senate Special Committee on Aging is holding its own confab on "Boomer Bust? Securing Retirement in a Volatile Economy.” The inclusion of the question mark seems at best questionable right about now; Fidelity recently reported that the average 401(k) account among plans it administers lost 27% in 2008.

An impressive lineup of retirement experts will be testifying at the hearings, discussing the flaws that have been around for nearly three decades but are now laid bare in this severe bare market. Among the points that will be hit: We don’t invest enough in our own retirement plans. Corporate America does a less than ideal job encouraging us to invest more; suspending the company match, setting automatic enrollment rates too low, and not divulging plan fees are just a few examples. And that no matter how intelligent or well-intentioned we are, it is a struggle against our human nature to make ideal investment decisions for a goal that is 20, 30, 40 years off in the future.

Now that retirement saving reform is getting debate time in Washington, what would be on your retirement plan renovation punch list? If you were summoned to testify on Capitol Hill, what would you lay out as the best and most helpful ways to improve your 401(k)/retirement savings? The forum is open…

– Carla Fried

A market dip in the years before retirement can be scary, but bailing out of stocks isn't the answer. Here's how to make sure you're still on track.

Question: I am 61 and plan to retire in about eight months. Given the current market, do you think I should withdraw some or all of my 401(k) money and put it in a safe place that is covered by FDIC insurance? This is part of my retirement income. —Peggy Wagstaff, Marietta, Georgia

Answer: There’s no doubt that the older you are and the closer you are to retirement, the more frightening the current economic crisis is. After all, if you’re ready to retire or have already called it a career, you simply don’t have as much time to wait for stock prices – and your 401(k) account balance – to rebound.

If you’re drawing money from your retirement portfolio for income and your investments are dropping in value, the double-whammy of withdrawals and losses leaves you with less capital to participate in the market’s recovery, increasing the chances that you may run out of money later in retirement.

But moving your 401(k) stash and other retirement savings into safe options like CDs, a stable value fund or a money-market fund isn’t the right response.

What you really need to do is give yourself a more comprehensive retirement check-up that looks not just at your 401(k) investments but also helps you figure out what other moves you may need to make to assure a secure retirement down the road.

Here are three steps you can take to make that broader assessment.

Coolly review your investment strategy

Hunkering down in the security of conservative investments may be emotionally appealing. But unless you’ve got a huge nest egg, the yields you’ll earn on such options are just too low to provide adequate income and maintain your purchasing power in the face of inflation over a retirement that could easily last 30 or more years.

So while the stock market may be the last place you want to put any of your retirement money right now, the fact is that you still need the long-term growth that equities have historically provided. The key is to get that growth without being pummeled too badly during market downturns.

One reason so many pre-retirees are hurting so badly now is that they went into this crisis with far too much of their retirement savings in stocks. In recent testimony [www.ebri.org] before Congress, Employee Benefit Research Institute research director Jack Vanderhei noted that nearly four out of 10  401(k) participants in their mid-50s to mid-60s had 80% or more of their account invested in stocks in 2006.

Hey, I’m an optimist when it comes to the long-term outlook for stocks. But unless you’re holding a big cache of cash or bonds in some other account, having 80% or more of your 401(k) in equities is just way too aggressive for someone already retired or nearing retirement.

Reasonable people can disagree about what the exact blend of stocks and bonds should be, but for anyone on the verge of retiring or already in the early stages of retirement, something in the neighborhood of 55% stocks and 45% bonds is more appropriate. As you age, you should cut back your stock holdings even more, until you’re down to 20% to 30% in equities by the time you’re in your 80s.

Determine whether your planned retirement date still makes sense

The key question you must answer here: Given your 401(k)’s current value, can you still draw enough from your account to live comfortably over the next 30 or more years without running out of money before you run out of time?

The only real way to know is to crunch the numbers. You must figure out how much income you’ll need to live comfortably in retirement and then see if you can realistically expect to generate that amount from Social Security, any pensions you may have plus what you can safely draw from your 401(k) and other retirement accounts.

Any decent financial planner should be able to help you with this sort of analysis. You can also do it on your own by going to an online tool like the Retirement Income Calculator in the Investment Guidance and Tools section of T. Rowe Price’s site.

Originally designed for people who were already in retirement, this tool has been re-tooled, so to speak, so that you can also use it if you’re still in the pre-retirement stage.

Plot a course of action

If you’ll have enough coming in to cover your living expenses, great. You can stick to your scheduled retirement date.

But if you’re coming up short – and I suspect many people will, given the toll the market’s decline has taken on retirement  accounts – then you’ll have to make some changes.

One option might be to retire on schedule but work part-time in retirement. Or you might decide to work a couple of more years. That would not only allow you to accumulate a couple extra years of saving, it would also give your portfolio a chance to recover.

And there’s another advantage to working a few more years: a bigger Social Security check. Each year you delay taking benefits beyond age 62, you get "delayed retirement credits" that can boost your monthly check by about 8% for each year you postpone up to age 70. Your Social Security check might go up even more because the extra accumulated wages can increase your benefit. You can see how much more you might receive by working a few extra years by going to Social Security’s new Retirement Estimator .

It’s crucial that you give yourself this sort of pre-retirement check-up before you leave a job that’s providing a good paycheck and decent health benefits. Otherwise, you may find yourself having to go back into the workforce where, as an older worker, you may have a hard time duplicating the pay and benefits package of your old employer.

Finally, whenever you eventually decide to retire, be sure to check in every year or two with a planner or calculator to assure that you’re not going through your retirement savings too quickly.

Starting with a modest initial withdrawal of around 4% of your retirement portfolio’s balance and then increasing that amount for inflation each year generally gives you about a 90% chance that your savings will last at least 30 years. But if your 401(k)’s value takes a big hit early in retirement and you don’t adjust your withdrawals, those odds can plummet.

So if you retire into a slumping market like this one, you may want to cut back your spending a bit so that your savings well doesn’t run dry late in retirement. After all, what could be more disconcerting than to realize that you’re in good enough shape to go another 10 or 20 years in retirement but your portfolio’s only healthy enough to make it another five?

iReport.com: What's your dream retirement?

Question: I am currently contributing 15% of my salary to my 401(k). With the current crisis taking a toll on the stock market, would it be a good idea to reduce my contribution to 10% and place the additional 5% somewhere else? —Verona, Savannah, Georgia

Answer: Without a doubt, the last few weeks have ranked as the most tumultuous – and scariest – times that I’ve experienced in the more than 20 years I’ve been at Money magazine.

We’ve witnessed events that up to now had been almost unimaginable with the stock market fluctuating wildly up and down and governments around the globe taking stakes in or seizing control of major financial institutions in an attempt to unlock frozen credit markets. Yet, despite the extraordinary steps that have been taken, the questions of when we’ll hit bottom and how long a recovery will take still linger.

Given all this turmoil and uncertainty in the present, I can understand why you might be tempted to scale back a saving and investing plan that doesn’t have its payoff until sometime way off in the future.

But reducing your 401(k) contributions now would be a mistake for several reasons.

Keeping Uncle Sam at bay

To begin with, you would be giving up some lucrative tax benefits. You pay no income tax on the money you contribute to your 401(k), nor on the investment gains your contributions generate, until you begin making withdrawals in retirement.

That tax deferral is a huge advantage, which means you’re much more likely to end up with a larger nest egg by contributing to your 401(k) than by saving in a taxable account.

So foregoing those tax breaks alone – even on a portion of your savings – means you will almost certainly reduce the amount of money you’ll have available to you when you retire.

Building a bigger nest egg

Depending on your company’s policy on matching contributions, you may also be turning away the equivalent of free money if you shift funds outside your 401(k).

For example, if your employer kicks in 50 cents for each dollar you sock away, you’re effectively giving up an instant 50% return on your contribution. That’s a terrific deal at any time, but especially attractive today when losses have been the norm.

And let’s be honest, you’ve also got to ask yourself whether you’ll actually end up saving this 5% of salary you’re planning to divert from your 401(k). Without the convenience of a 401(k)’s automatic payroll deductions, good intentions to save can too often succumb to the temptation to spend. That’s an important consideration because when this crisis passes and the economy and markets recover – which they eventually will – you will still be counting on the balance in your 401(k) to finance a big part of your retirement.

Indeed, the additional debt that the U.S. government is taking on to deal with today’s financial crisis will place even greater strains on the federal budget in coming years, increasing the possibility of cutbacks in already stressed programs like Social Security and Medicare. Which means that more than ever before your security in retirement will likely depend on how successful you are in growing the size of your 401(k).

Saving for a rainy day

So while you’ll certainly want to make sure you’re investing your 401(k) money appropriately given current conditions now is not the time to cut back on your contributions.

With one possible exception.

We’ve already seen the unemployment rate climb from less than 5% earlier this year to just over 6% as of September. If economic conditions continue to deteriorate, companies may be forced to pare payrolls to cut costs, and the ranks of the unemployed could swell even more. So it’s especially important now that you have an emergency cushion of three to six months’ living expenses that you can tap should you lose your job.

This reserve should be tucked away in one or more highly secure stashes, such as federally insured bank accounts and short-term CDs or money-market funds run by large well-known fund companies.  (For an extra measure of safety, you can stick to money funds that participate in the Treasury Department’s money fund guarantee program.

If you don’t have such a cushion, you need to start building one pronto. Ideally, you would want to do this by tightening spending rather than contributing less to your 401(k). But if that’s not possible, you may have to resort to temporarily putting away less in your 401(k) or other retirement accounts.

I can’t stress enough, however, that such a move, if needed at all, should be temporary. Once you’ve created your emergency fund, be sure to bump your 401(k) contributions back to where they were before, if not a bit higher to make up for lost ground. To assure that the amount you’re setting aside will allow you to retire comfortably, you can check out our Retirement Planner.

That exception aside, don’t let anxiety about today’s financial crisis interfere with funding your 401(k). Otherwise, you may end up facing your own personal financial crisis when you’re ready to retire.

Question: I’m a 50-year-old woman who has yet to set up any retirement fund. I have $5,000 that I can invest now to get started, and I may be able to invest another $1,000 to $2,000 every quarter. But I wonder whether this is just a high-risk gamble considering that I have such a short time until retirement. Besides, I’m not even sure where to put the money if I do start saving – in a 401(k), a Roth IRA, a CD or some other option? - A. Gonzalez

Answer: Saving for retirement a high-risk gamble? Hardly. The real risky bet for you would be to continue putting off saving for retirement until a even later date or, worse yet, forgo saving entirely. In fact, that wouldn’t be much of a gamble. Barring a huge inheritance or hitting the lottery, you would be virtually guaranteeing yourself a meager retirement at best.

But if you start saving now – and keep it up over the next 15 years or so – you still have a shot at accumulating a decent nest egg. I’m not saying you’ll be as well off as you would had you started saving 20 years ago. It’s not likely you’ll be able to squeeze a career’s worth of saving into 15 years. But if you really bear down in this home stretch to retirement, you still have a good shot at dramatically improving your retirement prospects. And you will definitely be better off than if you procrastinate further or save nothing at all.

So let’s outline exactly what you must do. Basically, you’ve got to deal with three questions: how to save, where to save and how to invest your savings? Let’s take them one by one.

How to save

It’s relatively simple to get a ballpark estimate of how much you must put away each year to have a shot at a comfortable retirement. Just go to our What You Need to Save calculator, plug in your age, income and the amount you’ve saved to date (which I gather for you is zilch), and you’ll get an immediate estimate of the dollar amount and percentage of salary you should save each year between now and age 65 to achieve a decent retirement.

Don’t be surprised if the savings target you get is daunting. That’s what happens when you put off saving until the end of your career. You’ve got to really sock it away to make up for all the years of saving and compounded returns you missed out on.

But at this point, the important thing isn’t to focus on what you didn’t do, but what you must do. So just try to get as close to the recommended savings level as you can so you can at least start making some progress. And, in fact, if you follow through with your plan and put away the $5,000 you mentioned and then another $2,000 a quarter as you say you may be able to do, by age 65, you would have roughly $340,000, assuming an 8% return. That’s a pretty good-sized nest egg starting from scratch at age 50.

Where to save

Let’s start with that $5,000 you mentioned. To get the biggest savings bang for those bucks, you want to put it into a vehicle that has some tax advantages. Basically, you have two choices: a traditional deductible IRA or a Roth IRA. With a deductible IRA, you get a tax deduction for your contribution and the investment gains on that contribution grow free of taxes, although you are eventually taxed when you withdraw the money. With a Roth IRA, you get not upfront tax break, but you can eventually withdraw your contributions and earnings free of taxes in retirement.

As I explained in a feature I wrote on Roth accounts in Money Magazine’s October issue, you’re generally better off in a deductible IRA if you think you’ll be in a lower tax bracket after you retire, while a Roth is the better deal if you think you’ll face the same or higher tax rate. People who are diligent savers and build up sizable balances in retirement accounts tend to be better candidates for a Roth IRA. Given your lack of savings to date, I expect you’re more likely to move into a lower tax bracket in retirement, which would make the deductible IRA a better choice. But you can check out this calculator to compare the two.

This assumes that you qualify for either or both types of IRAs, which I expect will be the case, although you can find out here. If you don’t qualify for either, you can put this five grand into a nondeductible IRA – which anyone under age 70 1/2 with earned income can open – and then later convert it to a Roth IRA.

As for the $1,000 to $2,000 you think you can save on an ongoing basis, your best bet for that money is to get it into a 401(k), which I assume is a possibility for you since you specifically referred to a 401(k) as an option in your question. There are lots of advantages to 401(k)s. But for someone like you who obviously has some trouble saving, the main selling point is convenience. Your savings go directly from your paycheck into your 401(k) account before you have a chance to get your hands on the money and spend it. That’s a huge, huge plus when you’re trying to build a nest egg in a hurry.

The other possible advantage is an employer match. If your employer offers one – and most do, typically 50 cents on the dollar up to the first 6% of salary you contribute – contributing to the 401(k) leverages your savings effort and makes it more likely you’ll be able to meet your annual savings target, or at least get closer to it. So at the very least, you want to be sure to put enough in your 401(k) to take full advantage of any employer match.

Where to invest your savings

You need the long-term growth potential of stock funds so that you have a chance to boost the value of your savings over the next 15 years. But you also need some bonds so your nest egg isn’t totally devastated by market setbacks. There’s no single “correct” mix of stocks and bonds for someone in your position. But if you invest roughly 70% to 75% of your savings in stocks and the rest in bonds, that should give you the long-term growth you need while affording a bit of downside protection.

One caveat: Some people who are getting a late start on retirement planning are tempted to invest much more aggressively because they figure higher investment returns can compensate for their lack of savings and boost the value of their nest egg. Remember, though, that higher returns come with higher risk – and there’s no guarantee the higher risk will pay off. You could end up with lower returns and a smaller nest egg. So I’d be wary of dialing up your stock exposure much beyond the range I’ve indicated. (As I’d be wary of scaling back stock exposure, unless you’re willing to really ramp up the amount you save.)

As for how to put together this blend of stocks and bonds, you have several choices. You can put together a portfolio yourself with individual stock and bond funds, if you’re comfortable doing that sort of thing. Or you can buy a fund known as a target-date fund that does it for you. Just pick a target fund with a date that roughly corresponds to the year you plan to retire – say, 2025 in your case – and you’ll get a ready-made mix of stocks and bonds that’s appropriate for your age. The fund will also gradually shift a larger percentage of its assets into bonds each year so that the fund becomes less risky as you near retirement.

Of course, you also have the option of having a professional money manager create a portfolio for you, but that’s usually not very cost effective for someone just starting out investing small sums. That said, some 401(K) plans now offer a “managed account” option in which an investment firm essentially manages your 401(k) investments for you. Read more on this option and how it compares to target-date funds or just doing it yourself.

For now, though, the single important thing you can do to improve your retirement prospects is start socking away as much money as you can and keep it at year after year. Because if you don’t start some serious saving soon, all the decisions about where to save and how to invest your money won’t amount to a hill of beans – or result in much of a nest egg.

Seeing your portfolio shrink can be tough so close to retirement, but you should still be investing for the long term.

Question: I'm 58 years old. At the beginning of June, my 401(k) was worth $482,000 and now it’s worth $430,000. How can I stop the bleeding? —John, Tyler, Texas

Answer: If your goal is simply to staunch the bleeding, the answer is simple. Just move all your money into your 401(k)’s money-market option. That will pretty much assure that your account balance will fall no further.

But I don’t think that should be your goal.

Why? Well, if you keep your money in your plan’s money-market option (or any guaranteed-return investment, for that matter), you’ll be relegating your retirement stash to a mediocre long-term return, which means that your nest egg isn’t likely to grow very much between now and the time you retire.

Of course, you could move it to a safe haven today with the idea of switching back to a portfolio of stocks and bonds at some point in the future. But you then have to figure out when the right time is to move it back. You don’t want to switch out of the money-market fund too soon and incur more losses. Yet if you wait too long, you can miss the big gains that come in the explosive early stages of a stock rebound.

So if stopping the bleeding isn’t the right goal, what should your objective be?

Pre-retirees like you who are in their mid-50’s to early 60’s and have 10 or so years to go before retiring ought to be pursuing an investing strategy that can generate enough growth to support them through a long retirement yet also provide enough downside protection to prevent a market setback from totally derailing their post-career plans.

Retirement home stretch investing plan

The heart of this strategy is coming up with a mix of stocks and bonds – asset allocation would be the technical term – that balances your long-term needs as a retiree against the short-term fluctuations of the market.

Although you may not think of it this way, even when you’re in the last stages of your career you are still actually investing for the long-term. It’s not as if your investing time horizon extends only to the day you retire. On average, a 65-year-old will live another 20 years or so, and the odds are good that you could live well into your ‘90s. So you still need long-term capital growth in your retirement portfolio to maintain purchasing power and assure you don’t outlive your assets.

At the same time, however, as you approach your retirement age, you can’t afford to take big hits to your portfolio’s value. You just don’t have as much time to bounce back from market setbacks as you did at the beginning or even the middle of your career. So while going for growth, you also need to protect the value of your savings.

You can argue about what constitutes the right stocks-bonds mix for a pre-retiree. Generally, though, someone your age should have roughly 60% to 65% of his retirement portfolio in stocks and the remainder in bonds. The stocks are there for long-term growth, the bonds for steady income and short-term protection. As you age, you would then gradually move more of your savings toward bonds, although even in your 80s and 90s, you likely want to keep 20% to 30% of your portfolio in stocks.

But this is a guideline. In fact, there is no “ideal” mix, one that’s guaranteed to give the best blend of protection and return. You’ll have to make a judgment call based on your own situation.

If you get really nervous every time the Dow takes a dive – or if you don’t have much in the way of resources beyond your retirement investments – you might want to stick to the lower end of this scale, or keep even less in stocks for that matter (although, remember, that will likely mean lower long-term returns and raise the odds that you could run through your savings).

Conversely, if you can tolerate swings in your portfolio’s value – or you have other resources to fall back on, such as a pension, sizeable home equity, etc. – then you could gravitate to the higher end of the scale. To see how different mixes might perform, check out the Asset Allocator tool at T. Rowe Price’s site.

Stomaching the ups and downs

It’s important that you understand that following the strategy I’ve outlined won’t protect you from any and all losses. But that’s not the point. Even at this later stage of retirement planning, it’s okay to suffer occasional setbacks. Indeed, you can’t avoid them if you want the long-term growth you also need. But the idea is to limit the size of those downdrafts so they don’t inflict irreparable harm.

You don’t say how your 401(k) is currently divvied up between stocks and bonds. But given the magnitude of the loss you’ve suffered since June (about 10%) compared to how the stock and bond markets have fared since then, I’d be surprised if you weren’t overloaded with stocks or invested in particularly volatile ones.

So I recommend that you re-assess your asset mix and bring it somewhere within the range I’ve laid out. Doing that won’t insulate you from all short-term setbacks. But it should increase the odds that your nest egg will be there to support you throughout your retirement.

When the market gets rocky, it can be especially hard on retirees who can't afford to wait out the bumps.  Give your portfolio a check up and make sure your investing strategy still works for you.

Question: My husband and I have been retired for five years. In just a few months our retirement portfolio of stocks and bonds has dropped in value from almost $500,000 to just over $400,000. Our broker says, “Hold on, it will come back soon.” But this is our retirement! We wonder if we should sell our investments and invest the proceeds in federally insured CDs. What do you think? —Anne, Huntsville, Alabama

Answer: First, let me say I totally understand your concern. After you’ve retired, seeing the savings you’re depending on to support you the rest of your life take a hit of nearly 20% can really rattle you, especially when there’s no guarantee that the slide might not end there.

But I don’t think moving your entire stash into CDs is the answer. While CDs do provide security of principal – assuming you take steps to assure they’re covered by FDIC insurance – they don’t offer very high returns these days, nor much long-term protection against inflation.

So although shifting your nest egg into CDs might provide short-term comfort, in the long run it may make it more difficult for you to maintain your standard of living in the face of rising prices later in retirement.

That said, I also don’t think the right answer is for you to automatically follow your broker’s recommendation and wait things out. Blindly following this advice when you’re clearly very fearful and conflicted about it wouldn’t make sense.

All of which is to say that I think you need to sit down with your broker and go over your overall investing strategy. And by strategy I don’t mean just an explanation of why your broker believes your investments will come back.

I’m talking about an in-depth discussion during which your broker explains how your savings are divvied up between stocks and bonds, outlines exactly what types of stocks and bonds you’re invested in and demonstrates why this is the right approach for you.

At the very least you want to know why your portfolio has lost almost 20%. That’s a big hit considering that over the past three months, the broad stock market has lost about 10% of its value on a total return basis and bonds have lost about 2%.

Of course, the market has been down a lot more than 10% several times this year, so maybe you’re measuring your loss over a slightly different time period. But either way, for the value of your portfolio to dip anywhere close to 20%, you would likely have to be invested pretty darn aggressively, particularly for a retiree. So you need to know the rationale behind this portfolio.

You and your broker should also talk about such issues as how much money you intend to withdraw each month from your savings to meet expenses, how many years you need your portfolio to last, what sorts of other resources you and your husband can tap (pensions, home equity, income from part-time work, etc.) and how much risk you’re willing to take.

But this shouldn’t be just a gabfest. Your broker should be able to give you a sense of how long your portfolio might reasonably last given the way your money is currently invested and how much you’re withdrawing each month.

I’m not talking about a guarantee. That would be unrealistic. But by using computerized simulations, your broker should be able to give you a reasonable estimate of the probabilities of your portfolio running dry based on different withdrawal rates and how well or badly the market performs.

Even more important, your broker should be able to run some alternative scenarios for you, showing how your portfolio’s longevity might change if you invest differently from what he’s recommended (for example, going into CDs).

In short, your broker needs to do a comprehensive review of your portfolio with you so you can decide whether the course your broker has mapped out still makes sense or whether you need to take a different tack.

The kind of analysis I’m talking about isn’t rocket science. Any competent adviser should be able to do it. You can also do a simplified version of your own using online tools.

So I recommend you and your husband contact your broker and then go through the sort of exercise I’ve outlined above. If your broker can’t or won’t do this – or you don’t have confidence in the analysis you get – then you may want to search for a new adviser who can help you arrive at a more acceptable investing and retirement income strategy, and who’ll respond with more than bromides when things go wrong.

Having a lot of fancy acronyms after their name doesn't mean they're experienced or honest. Do your own research before you choose an adviser.

Sign up for the Ask the Expert e-mail newsletter

Question: I expect to retire in about three years at age 66 and need advice on what I should do with my 401(k) and a lump sum from my pension plan after I leave my job. I met with a “retirement planning specialist” whose card also said he had a “Wharton certificate in retirement planning.” I have no idea what any of this means. Can you shed some light on these credentials? –H.G.

Answer: When it comes to advisers touting their retirement-planning expertise, there’s no shortage of credentials. You’ve got your CSAs (Certified Senior Advisors), CRFAs (Certified Retirement Financial Advisers), CSCs (Certified Senior Consultants), CRCs (Certified Retirement Counselors)…and lord knows how many more designations that have popped up in the time it took you to read this sentence.

But as I’ve noted before, the difficulty isn’t finding people who claim to have designations that suggest special expertise. It’s determining whether a credential requires rigorous training that can truly improve an adviser’s effectiveness or whether it is really a convenient way for advisers to impress potential clients.

In the case of the adviser you mention, I can tell you that the certificate in retirement planning issued by the Wharton School of the University of Pennsylvania is part of a special executive education program created by Wharton and AXA, the big insurance and financial services company.

The program, which is open only to AXA advisers, is essentially a five-day affair. The certificate that attendees receive attests to the fact that they attended and completed the course. There’s no exam. I don’t want to suggest the course is fluff. The advisers study a variety of retirement issues with such well-known Wharton professors as Olivia Mitchell and they do a case study, which is critiqued. But it’s not as if they’re getting a Wharton MBA in retirement planning.

As for that term “retirement planning specialist,” it’s a purely internal title that AXA allows advisers who attended the program to use.

Why, you may ask, are we seeing this proliferation of men and women of letters? Well, one reason is that with the baby boomers marching into retirement, there’s clearly a growing need for more proficiency handling such issues as saving and investing for retirement and turning 401(k)s and other accounts into lifetime income. No doubt many advisers want to learn as much as they can to help clients navigate such matters.

Then there’s a less charitable explanation, which is that initials and designations can create an aura of credibility, warranted or not, and make it easier to sell products that generate fees.

And make no mistake, the use of some credentials by some advisers has been a problem. In testimony last year before the Senate Special Committee on Aging, Massachusetts Secretary of the Commonwealth William Galvin claimed that the Certified Senior Advisor designation has been used by annuity salesmen as a deceptive marketing tool.

In the wake of such allegations, the Society of CSAs has begun requiring that advisers who use the designation provide a disclosure statement to clients that, among other things, says that “the CSA designation alone does not imply expertise in financial, health or social matters.” Well, thanks for clearing that up.

So how can you increase your chances of ending up with an honest and competent adviser who can really help you address retirement-planning issues as opposed to just salesperson with a string of letters after his or her name?

Well, the first thing you must realize is that no designation – even the mighty CFP (Certified Financial Planner), which is generally considered the creme de la creme for advisers dealing with individuals’ personal finances – guarantees competence or, more importantly, integrity. You’ve still got to assess whether this person has sufficient expertise and is willing to put your interests ahead of his or her own.

Ultimately that’s a judgment call – and a tough one – but you’ll increase your chances of making a good decision by checking with state, federal and other regulators to see whether the adviser has a history of complaints from clients.

It’s also a good idea to get referrals from well-regarded industry groups like the Financial Planning Association or the National Association of Personal Financial Advisors, as well as recommendations from friends or relatives who have had success with an adviser.

On the other hand, I’d be wary of any advisers who contact me unsolicited, and doubly wary of ones who run free retirement-planning lunches or seminars. Many times such sessions are just a come-on to sell high-priced investments.

Above all, though, you’ve got to maintain a healthy sense of skepticism and trust your instincts. I think you can tell when someone is trying to sell you something as opposed to listening to you talk about your needs, concerns and goals then trying to create a solution that addresses them.

If an annuity or some other product the adviser sells always seems to be the top solution or if the adviser is reluctant to outline fees in writing, then perhaps the letters that should be on that person’s card are GSA (glorified sales associate) – and maybe you should just walk away.

Got a question? Ask the expert.