University of Pittsburgh business school professor Dennis Slevin got to thinking about how much a worker would have to save in a 401(k) account to replace 75 percent of his final year's pay by withdrawing 5 percent annually from the account in retirement. Dr. Slevin, who earned his Ph.D. in organizational behavior, made some assumptions to perform his back-of-the envelope calculation. Experts who have looked at this much more systematically question some of his assumptions, but they don't question the conclusion Dr. Slevin reached.

"It is undeniable that many people are neither saving enough, nor are they aware of the amount required to meet their retirement income goals," said Robert J. Standish, a certified financial planner with BPU Investments, Downtown.

Dr. Slevin assumed a worker started with a $50,000 annual salary, received about 2 percent pay increases annually for 40 years, leaving him with a $100,000 salary at retirement. Through a combination of the worker's contributions and employer matches, 25 percent of the worker's annual pay went into a 401(k) plan. Without compounding, the investments earned 5 percent a year.

After 40 years, the worker will have $1.5 million, half from the contributions and half from investment returns. The retiree could withdraw 5 percent of his 401(k) balance and collect $75,000 annually from the account.

Bottom line: It would take Dr. Slevin's worker 40 years of saving the equivalent of 25 percent of his income to replace 75 percent of his final year pay.

Frightening enough to get your attention?

Dr. Slevin acknowledges there's a few crucial things missing from his work-up, including that he didn't compound the returns. Mr. Standish says compounding would increase the $1.5 million retirement stash to about $2.2 million.

Also missing from the picture is Social Security. Looming deficits notwithstanding, workers will collect something from the government. The average retiree received $13,836 in Social Security benefits last year according to the Pension Rights Center, a Washington, D.C., advocacy group. Monique Morrissey of the Economic Policy Institute says workers replace about 40 percent of their pre-retirement income by drawing Social Security.

Some will collect a pension, further reducing their reliance of their 401(k).

Breathing easier? Maybe you won't when you hear what's working against this model saver.

Dr. Slevin's scenario assumes the 401(k) account returns 5 percent, year after year. But markets don't work that way, as the last two years have illustrated. James Holtzman of Legend Financial Advisors in McCandless estimates that if the worker retired after Wall Street's sharp decline last year, he would have to withdraw about 8 percent of his 401(k) money in order to collect $75,000. That would increase chances of the worker outliving his retirement funds.

Also, Dr. Slevin's worker lives in a world free of inflation. If he lived in the real world, where inflation ran about 4 percent a year over the last four decades, a $75,000 distribution 40 years down the road would only cover only $15,183 of expenses in today's dollars, Mr. Standish says.

He believes that taking out 5 percent a year might be too much. Mr. Standish cited a Fidelity Investments study that concluded that a 5 percent, inflation-adjusted distribution rate would deplete a retirement fund in 34 years (age 99 for someone who retires at 65) if investment markets were normal over that time period. But if there were an extended bear market, the money would be gone in 21 years, when the worker turned 86, Mr. Standish said.

"Four percent [withdrawal] is very safe," he said.

The Center for Retirement Research at Boston College has worked up estimates of what workers who open a 401(k) at 22 would have to save in order to replace 70 percent of their last year's income. The estimates are based on collecting from Social Security and an annuity they purchased with their 401(k) account. Someone who retired at 65 with a $100,000 salary would have to salt away 7.3 percent beginning at the age of 22.

"If they start early, the saving rate does not have to be extraordinarily high," says center director Alicia H. Munnell. "If you start late, you have to save at a very high rate."

Most studies indicate workers aren't saving enough. The Employee Benefit Research Institute says the average worker in his 60s had a 401(k) balance of $125,052 at the end of 2008. If he retired then and took out 5 percent, he'd draw about $6,300 annually.

The research group said 46 percent of participants had balances of less than $10,000.

The point of this isn't to convince you of the futility of retirement saving or to save 25 percent. Even if you could, restrictions on 401(k) contributions would prevent you from saving that much, and your employer's match probably isn't generous enough to make up the difference.

Hopefully, it will encourage you to set aside some time each year to determine what you think you'll need and estimate what you need to save. Mr. Holtzman says he makes it an annual exercise with his clients "because the numbers change every year."

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