We've heard the adage that to become physically fit, we need to eat less and exercise more. The corollary for fiscal fitness is to spend less and save more.

A new retirement-readiness study suggests that we save more and retire later.

The new study from the Center for Retirement Research at Boston College resulted in the creation of the National Retirement Risk Index - a nationally representative index to serve as a lightning rod for one of the most compelling challenges facing the nation. In fact, the study is more comprehensive in scope than others that strive to measure Americans' preparation for retirement.

The biggest finding: 43 percent of households are on course to retire with less than adequate income. The numbers are worse for younger boomers and Generation Xers than for older boomers - those born between 1946 and 1954. That's partly because older boomers have a greater likelihood of getting monthly incomes from traditional pension plans. These defined benefit plans are losing the popularity contest to defined contribution plans such as 401(k), 457 and 403(b) plans. The primary difference between the two types of plans: Employers are responsible for funding the old-fashioned kind, while workers must fund the others.

Most studies point to the same conclusion: Workers are not doing enough to prepare for a smooth transition to retirement. This study also paints the retirement picture in darker-than-golden hues, but it offers hope.

Findings, assumptions, improvements

First, let's review the study itself. Then we'll take a closer look at the findings and the assumptions behind them. We'll figure out how we can make changes for the better. And finally, look at the consequences of failing to make those changes.

Retirements at Risk study

The study draws data from the Federal Reserve Board's Survey of Consumer Finances, which has been collected every three years since 1983. The 2004 survey gleaned information from 4,500 households across the nation, including statistics on income, assets and pension coverage. In its projection of retirement income, the study includes assets from 401(k) plans and IRAs, home equity, pension plans and projected Social Security income.

The study's authors came up with target replacement rates of pre-retirement income for the heads of American households when they reach age 65. Overall, American households need 73 percent of their pre-retirement income to continue their consumption patterns into retirement without compromising their lifestyles. The target replacement rate is less (67 percent) for high-income groups and more (81 percent) for low-income groups.

Finally, the study compares projected replacement rates with appropriate target rates to see how they jibe. If projected replacement rates fall 10 percent below the target rate, they're considered at risk.

The study concludes that 35 percent of early boomers (born between 1946 and 1954) won't be able to maintain their standards of living during retirement; 44 percent of late boomers (born between 1955 and 1964) won't be able to do so. Just about half (49 percent) of all Generation Xers (born between 1965 and 1972) will fall short of retirement readiness.

The assumptions

The study assumes a retirement age of 65 and that retirees will wring out the value from all their assets to make ends meet during retirement. For example, financial assets such as 401(k)s and IRAs will be used to purchase inflation-indexed annuities (which are neither readily available nor popular with consumers, the study's authors concede, but they provide a convenient tool for converting a lump sum of wealth into a stream of income). Also, the study assumes that Americans will take out reverse mortgages on their homes to help pay for their expenses.

Those assumptions run counter to actual events in American households. In fact, many Americans retire earlier than age 65 due to circumstances beyond their control. Many don't buy annuities, and most don't take out reverse mortgages. That may very well change. Today's retirees are living in a 'golden age' that will fade as baby boomers and Generation Xers reach traditional retirement ages in the coming decades, say the study's authors.

The implication: We might be forced to drain our assets if we don't proactively change our retirement or savings patterns now.

Changes for the better

Here's how we can tweak ourselves into a more secure retirement, according to the study: Increase our savings rates by 3 percentage points from an early age.

OK, that's not a pat solution that applies to every individual; it's a statistic that, broadly applied, improves the numbers in a study. For one thing, the right number for you would depend on what you've been saving all along. If you've been diverting 5 percent of your income into a retirement plan, you'd have to bump it up by more than 3 percentage points. If you've been saving 20 percent, you probably don't need to do anything.

For another thing, some of us are too old to implement this strategy successfully. We don't have a time machine that would enable us to go back and increase our savings by 3 points from an early age. But we can increase our savings rates beginning now - or at least before we approach that impending retirement deadline.

The study suggests another option: Put off that deadline until age 67. Our retirement prospects would improve immensely if we could continue to add to our retirement savings an extra two years. Statistically speaking, the 43 percent of Americans at risk of having inadequate savings would drop to 32 percent if retirement were postponed to age 67.

What's the amount of money that younger workers should put aside to guarantee their retirement security?

The Center for Retirement Research suggests they should consistently set aside 6 percent of their income (assuming a 3 percent additional match from the employer) for a total of 9 percent. If the money is invested prudently and not tapped for other purposes during their working years, this should provide adequate income.

But other estimates run higher. Christine Fahlund, a certified financial planner at T. Rowe Price, says workers should save 15 percent of their incomes to ensure a prosperous retirement. She figures this would result in enough assets to replace just 50 percent of pre-retirement income.

Why change is needed: The consequences

The study cites several reasons for the dramatic change in our nation's retirement income landscape. For starters, Social Security benefits will be delayed for many boomers, as the retirement age for full benefits rises from age 65 to 67. Other factors that spell doom: We live longer; we don't have traditional pension plans to fall back on; and bond yields and stock market returns aren't expected to produce a lot of income for retirees.

Also, we stink at saving outside our retirement plans, and we're not even that great at saving within our defined contribution plans. Fed Chairman Ben Bernanke said in a speech that workers don't pay enough attention to their savings and investment decisions. Notably, despite the tax advantages of 401(k) contributions and, in some cases, a generous employer match, one-quarter of workers eligible for 401(k) plans do not participate, he says.

Here's the retirement study's finding: In theory, 401(k) plans could provide adequate retirement income, but individuals make mistakes at every step along the way, and the median balance for household heads approaching retirement is only $60,000. ... Households fail to participate (in retirement plans), fail to save enough, invest too conservatively, or concentrate excessively on employer stock, and fail to roll over their plan balances on job change.

Not surprisingly, the study discovered that those making low incomes are at higher risk of not having enough in retirement, and may not even be able to afford the basic necessities, while those in the highest income group (not all that high, with a median income of $100,000) may just have to alter their lifestyles in retirement.

Tell your sons and daughters to start saving for retirement at the same time they're paying off student loans. And increase your own savings if you possibly can.

Here's the bottom line: We can choose to spend less and save more now. Or we can spend less later because we won't be able to afford to do otherwise.

Investment Social Security