5 Ways to Replace Your 401(k)

Social Security is reformed. Suggestions include raising payroll taxes, especially on higher-income folks who currently stop paying Social Security taxes on earnings over $106,800; increasing the retirement age, and lowering benefits or reconfiguring them so they provide more support to lower-income retirees and less to those with higher incomes. A big debate on what exactly should be done is widely anticipated; groups like the AARP oppose changing the current benefit structure and support eliminating the payroll cap. Other policy analysts, such as AEI's Biggs, say the incentives need to be changed so people delay their retirement age. Biggs suggests reducing the Social Security payroll tax on workers approaching retirement age to make postponing their retirement day more worthwhile.

David John, senior fellow at the Heritage Foundation and a principal in the bipartisan Retirement Security Project, says that when Social Security was created, people spent about 16 percent of their lifetime in retirement. Now, they're retired for about a quarter of it. That's part of the reason he suggests changing the retirement age from 65 to 68 and the early retirement age from 62 to 65.

Americans become super savers. This strategy is hard to argue with. As John Bogle, founder of Vanguard, has pointed out, the vast majority of Americans are not saving enough for retirement. In congressional testimony he gave in February, he pointed out that the median 401(k) balance is just $15,000. Even if the average person were to save $300,000 by the time he retired, that would replace only about 30 percent of his pre-retirement income—not nearly enough to live on. Bogle says that the typical employee should contribute 15 percent of his income each year into a retirement account. With a 5 percent return, he would have around $630,000 upon retirement, which Bogle calls a "handsome" amount.

As Biggs puts it, "Young people shouldn't worry. They should just start saving."

Corrected on 06/23/09: An earlier version of this story incorrectly implied that David Walker first came up with the idea of creating "auto-IRA" accounts. He supports the creation of the accounts, but was not the person to first suggest them.