According to Hewitt Associates, the gap between the amount of money currently saved by U.S. employees and what they need to save in order to maintain their standard of living in retirement has increased significantly in recent months.

In July 2008, Hewitt predicted that employees needed to replace about 126 percent of their final pay at retirement. At the same time, Hewitt examined the projected retirement levels of about 2 million employees, and found that, based on their current retirement savings balances and behaviors, most employees were on track to replace just 85 percent of their income. Now, in a new analysis of retirement savings, Hewitt has discovered that most workers are now on track to replace just 81 percent of their income.

In a press release announcing its analysis, Hewitt illustrated the true severity of the situation with the following examples: “[A] typical 55-year-old employee with a current average 401(k) savings rate of 10 percent of pay will need to save an additional 12 percent each year until age 65, or work for 2 more years, to replace what was lost in 2008. The average 40-year-old with a current average 401(k) savings rate of 7 percent must work 1 more year or save an additional 1 percent of pay per year until age 65.”

Hewitt further explained that even if employees recoup their losses from recent months, their projected retirement income levels are still expected to fall short. Hewitt provided the following illustration: “Before the financial downturn, an average 40-year-old with 10 years of service, earning $83,000 at retirement in today’s dollars needed to save enough to provide $104,500 per year in retirement. However, the average 40-year-old was only saving enough to provide $70,500—a $34,000 annual shortfall. Since the financial upheaval, that shortfall has grown to $37,350 a year, or a lump sum amount of approximately $400,000.“

What can employees do to help themselves? Hewitt offers a number of suggestions for employees for “maximizing their retirement plan’s earning potential:”

• Make sure they are contributing enough money to get their full company match.
• Continue to increase their 401(k) contribution rates annually (via automatic contribution escalation or on their own initiative). For example, contributing 1 percent more per year can increase retirement savings by 50 percent or more, according to Hewitt
• Make sure their portfolios are properly diversified and invested in the right mix of funds.
• Take advantage of services and tools offered by employers that can assist them with making informed investment choices