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?

Just about all parents tell the same war stories from childhood: "When I was your age, I had to walk two miles – in 3 feet of snow — to get to school." Or, "When I was your age, we had only one TV in the house." But pretty soon, parents may add this one, too: "When I was your age, I didn't have an IRA."

The Obama administration wants to stop that story in its tracks.

IRAs, along with 401(k)s, didn't exist until the mid-1970s. But after 30-plus years, the plans still are not ubiquitous. As Time magazine columnist Justin Fox points out in his blog post, only 57.7% of U.S. workers have some kind of retirement plan. The rest are counting on other savings and/or Social Security.

And that's a problem, because according to the latest data from the Employee Benefit Research Institute, half of workers ages 55 and older have less than $50,000 saved. The bear market isn't helping. From the start of 2008 through the first four months of this year, 401(k) account balances for workers ages 55 to 64 fell an average of 10% to 20%.

Obama's plan for IRAs does not make the accounts universal. Instead, it targets employers that don't offer a retirement plan to workers. But like Social Security, the benefit would be automatic. If workers aren't given a 401(k) or similar option, then their employer must automatically open an IRA on their behalf and make contributions through direct deposit, pulling the cash from the workers' paycheck. Employees who don't want to participate could opt out.

Critics claim such a plan would A) be too expensive, B) help turn the U.S. into a "nanny state," and C) be too burdensome for small businesses.

But it's also hard to argue against a program (any program) that would help people build some retirement security. You can't rely on employer contributions for it: Just consider the number of companies that cut their 401(k) match this year. Individuals aren't dependable, either.

And even as dramatic as Obama's proposal seems, it doesn't cover everyone. A growing number of company 401(k) plans have an automatic enrollment feature, but not all do.

We already have too many choices to make: How to invest our account, when to rebalance and how much to draw down, for example. Automatic IRAs and 401(k)s could take one decision off the table — and save future generations from hearing yet another story that starts, "When I was your age…"

Twenty percent of respondents to a recent online survey at Morningstar.com came clean that they don’t intend to invest in their IRA this year. Another 34% said they hadn’t gotten around to it, but planned on ponying up the contribution before the April 15; though those responses were clocked before the Dow nose-dived below 7,000 yesterday.

Look, there’s no denying that investing right about now is as fun as root canal, but bypassing your IRA is not going to help matters one bit. If there’s one thing that is a 100% guarantee in light of the 50% drop in the stock market it is that you need to invest more, not less, to have a shot at retirement security. According to the Employee Benefit Research Institute less than 20% of individuals over age 55 have more than $250,000 in retirement assets (and just to be clear, this factoid was circa early 2008 before the carnage). That works out to an annual income stream of no more than $10,000 a year based on a conservative-and rational-4% withdrawal rate.

That’s not going to make for a comfy retirement, folks.

Unless you are in a serious financial squeeze due to a layoff, you simply can’t afford to bypass saving as much as you can for retirement; stuff the 401(k) and plump up your IRA. Don’t qualify for a Roth IRA or a deductible IRA? So what. Put the money in a non-deductible; you get tax-deferred growth and starting in 2010 you’ll be able to convert into a Roth.

And no one says you have to dive off the deep end into stocks; invest in fixed income if that’s all you're up for at the moment. Ideally you can stick with your long-term allocation strategy and not totally give up on stocks, but right now if that’s going to interfere with your sleep, then at least fund your IRA with bonds or cash. For a list of recommended stock and bond funds, check out this Morningstar post.

– Carla Fried

Tucked in among the ambitious programs laid out in President Barack Obama’s proposed 2010 budget yesterday was a welcome provision for employees of small businesses: the creation of an automatic Individual Retirement Account (IRA). As Obama pointed out in his budget proposal, some 75 million Americans—roughly half of all workers—lack any sort of employer-based retirement plan, such as a 401(k). And that group includes most employees of small businesses.

First proposed by policy experts Mark Iwry of the Brookings Institution and David John of the Heritage Foundation, this plan would require employers that don’t currently offer a retirement plan to automatically enroll their workers in a direct-deposit IRA. Employees would be allowed to opt out. The auto-IRA has already received wide bipartisan support—Obama and Republican presidential candidate John McCain both endorsed it during their campaigns. And in 2007 a bipartisan bill to create an auto IRA was introduced in Congress.

As part of this plan, the White House budget also calls for expanding the saver’s credit, which is a tax credit for middle- or low-income workers saving in 401(k)s or IRAs, to 50% of the first $1,000 for Americans earning less than $65,000. Together these moves would increase savings participation for this group of workers from 15% to around 80%, according to White House estimates.

Will the auto-IRA be enacted? Quite possibly, given its previous support. But the plan, which is expected to cost some $55 billion over the next 10 years, has already been greeted with skepticism by some Congressional Republicans. And crucial details have not been spelled out that could prove to be dealbreakers. Under an earlier version of this plan, for example, employers would receive a tax credit of up to $250 each of the first two years they offered the auto-IRA, as way to offset administrative costs. And employee contributions would be defaulted into a low-cost investment fund, unless the worker chose an alternative investment. Neither of these features is mentioned in the White House budget overview.

If the plan does make it through Congress, it would be only a first step toward solving America’s retirement savings crisis. As we explained in our recent story “It’s Time to Fix the 401(k),” defined contribution savings plans, such as 401(k)s and IRAs, have largely failed to deliver secure retirement income—and that was true even before the market meltdown. The shortfalls of these plans were the subject of two Congressional hearings earlier this week. One, by the House Committee on Education and Labor, is just the first of a planned series of hearings on 401(k)s and retirement security. And a hearing held by Senate Aging Committee took a look at the poor performance of many target-date retirement funds, which have become the default option in most 401(k)s.

Of course, for the overwhelming majority of Americans the biggest problem has not been the type of savings plan they have, but the fact that they didn’t save at all. As a result, more than half of baby boomers are at risk of being unable to maintain their standard of living in retirement unless they put away a lot more and work longer, according to studies by the Boston College Center for Retirement Research.

Given that shortfall, the auto-IRA could make a difference, but on its own it clearly won’t be enough. The plan would enable workers to save up the maximum IRA limits—$5,000 in 2009 (up to $6,000 for those age 50 and older). That’s much less than the $16,500 ($22,000 for those age 50 and older) for 401(k) participants can stash away. Still, it’s at least a start.

– Penelope Wang