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You might believe that your retirement plans give employees an opportunity for worry-free golden years — and maybe they do. But when the time comes, many employees are surprised to learn they aren't nearly as well off as they had hoped.

Why? Because retirement plans are typically designed assuming that employees need to replace 70 to 80 percent of their pre-retirement income to maintain their standard of living. But this generalization holds true only for employees who retire at age 65, are exposed to relatively modest price inflation and health care costs, are not in a low-income bracket, and earn investment returns on 401(k) and other personal savings at a modest but level rate. Clearly, many workers don't fit into these categories. And, unfortunately, investment returns over the past several years haven't cooperated.

In addition, the 70 to 80 percent rule of thumb assumes that employers will continue to pay much of the cost of post-retirement health care. But recent research by Watson Wyatt reveals that, by the year 2031, retirees eligible for employer-provided health benefits will shoulder substantially more of the costs of their health care in retirement. As much as 90 percent of the cost of these benefits, under plan provisions already adopted by many employers.

Retirement Income Target Tool

Given these changing scenarios, and recent negative publicity about pensions, it has become vitally important for U.S. employers to review the adequacy of their retirement plans and help employees better understand how their benefits work. Watson Wyatt has developed a tool for employers to compare the need for retirement income to the available sources of retirement income under a wide array of assumptions.

The Retirement Income Target Tool (applicable to plans sponsored by U.S. employers) uses Department of Labor statistics, Social Security and Medicare data, provisions of the U.S. tax code and Watson Wyatt research to develop expectations for the behavior of large groups of retirees. Based on these averages and trends, the tool illustrates the extent to which employer-sponsored retirement plans are likely to meet participants' retirement income needs.

While not a financial planning tool for individuals, the Retirement Income Target Tool allows employers to more realistically evaluate their retirement programs, providing critical views of retirement plans, with and without health care costs, for employees retiring early and at age 65.

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