As goes your 401(k), so goes your retirement. Grasp that fact and you will be one crucial step closer to being able to retire when you want, with the money you want, to live the life you want.

Sure, Social Security will provide some retirement income. But it’s not a complete solution, as the maximum monthly benefit in 2009 was a relatively modest $2,323. Moreover, future retirees may face reduced benefits. It’s not exactly a state secret that even before the financial crisis, Social Security was in serious need of an overhaul. The push for reform will likely be turned up a few notches as the Congressional Budget Office’s latest forecast is for the federal deficit to run more than $9 trillion between 2010-2019.

And it’s unlikely a pension will secure your retirement because businesses have drastically reduced coverage since the introduction of the 401(k). In 1992, 40 percent of families were covered by a private-sector pension, today only 17 percent.
 
Plus, you will likely face stiff health care costs in retirement. Medicare is another federal budget-buster that seems destined to go under the knife in the coming years. But even at today’s benefit levels, Medicare will not cover all of your medical costs in retirement. According to the non-partisan Employee Benefit Research Institute, to have a 50-50 probability of being able to pay anticipated retirement medical expenses not covered by Medicare, a 65-year old man needs between $68,000 and $173,000, and a 65-year old woman between $98,000 and $242,000, given an average life expectancy that is three years more than men. Bump that up to a 90 percent probability, and the estimated tab rises to a high of $378,000 for men and $450,000 for women.

Clearly, government programs and private pensions are not going to do all the heavy lifting to get you the comfortable retirement you want and deserve. Personal saving is needed, too. And the 401(k) is your single best retirement savings vehicle.

Yes, the 401(k) has some serious flaws, including a lack of fee transparency, confusing investment choices, and most importantly, a dearth of guidance for participants on how much needs to be saved today to ensure a comfortable retirement decades down the road. Both Congress and the Obama administration say they want to plug some of the holes. In its 2011 budget, the Obama administration put the retirement focus on requiring all but the smallest firms to create  an Automatic IRA (employees would have to opt out rather than opt in) and expanding the Saver’s Credit, which would match 50 percent of the first $1,000 of contributions to such retirement accounts by families earning less than $85,000. Meanwhile, Congress is considering proposals to increase fee transparency and improve fund choices.

But such changes won’t happen overnight. The good news is that you can rehab your retirement strategy with just a few well-placed tweaks. Here’s your do-it-yourself 401(k) renovation project.
 
1.Plan for a safe withdrawal rate.
One of the keys to a comfortable retirement is understanding how much you can safely withdraw from your savings in retirement. To have high confidence that you won’t outlive your money, most financial planners suggest withdrawing no more than 4 percent a year. So, if you have a $250,000 401(k), that works out to an expected income of $833 a month. And remember, unless you are saving in a Roth 401(k), your withdrawals in retirement will be taxed, further reducing your net income.

Begin by getting a grip on where you stand now. 

• Use a free online calculator to get a sense of how much monthly income your various retirement income sources (401(k), Social Security, a pension if you have one) will generate, assuming you stick to a 4 percent withdrawal rate for your 401(k).
Don’t panic if the numbers don’t meet your goals.  Careful planning can solve your projected income shortage.

• Plan to work longer. Delaying your retirement for three or four years can make up a lot of shortfall. You earn money while your nest egg grows. 

• Consider delaying when you begin to draw Social Security. Everyone is eligible to start receiving Social Security at age 62. But the benefit you lock in at age 62 (adjusted annually for inflation) will be 25 percent to 30 percent lower than if you wait to begin drawing the benefit at your Full Retirement Age. Your  Full Retirement Age is between age 65 and 67, depending on your date of birth. And if you wait until age 70 to begin receiving Social Security, your payout can be 80% more than what you would qualify for at age 62. (To get a sense of how long you might live, check out this longevity calculator.)

2.Vow to save a little bit more every year.
The main focus in Washington in recent years has been to get more Americans to participate in their 401(k) plan, with less emphasis given to how much is saved. The Pension Protection Act of 2006 was a huge step forward on the first goal, as it included a provision that made it easier for corporations to add an automatic enrollment feature. But most plan sponsors that have adopted auto-enrollment have also chosen a default contribution rate for employees that is typically four percent or less of salary; that’s not even half of the 10 percent to 15 percent savings rate financial experts recommend to build a sufficient retirement fund.   What’s needed next is a bit of regulation tweaking to make it easier for firms to also provide auto-escalation in a 401(k) plan. This feature gently raises an employee’s contribution rate by 1 percent or so a year up to a pre-determined annual deferment level of 10 percent to 15 percent of salary. But enactment will take time.

Here’s what you can do today to save more:

• Create your own manual-escalation plan. Set a date each year to contact your plan administrator and increase your contribution rate. If you are currently contributing just three or four percent of your salary, push yourself to increase your contribution rate by 2 percentage points a year, until you get to a salary deferral rate of at least 10 percent of salary. (Or you bump into the annual contribution limits: In 2010 you can contribute $16,500 if you are under 50 years old, and $22,000 if you are at least 50.)

• Earmark a portion of raises and bonuses for retirement. Frank Armstrong, president of Investor Solutions, a Coconut Grove, Fla., investment advisory firm and author of “The Retirement Challenge: Sink or Swim,” recommends increasing your 401(k) contribution rate every time you get a raise or bonus. “You haven’t received the money yet, so it’s easier to save what you’re not accustomed to spending,” says Armstrong. To build a secure retirement, try to siphon off 50 percent of future raises and bonuses for your retirement. For example, if you receive a 3 percent raise, increase your contribution rate by 1.5 percentage points.

• Take advantage of catch-up contributions. As stated earlier, you can contribute an extra $5,500 to your 401(k) in 2010 if you are at least 50 years old, for a maximum contribution of $22,000. 
 

3. Keep fees low.
What you pay to invest in your 401(k) has a huge impact on your future retirement security. A recent study by the Government Accountability Office pointed out that over a 20-year period paying one percentage point less in annual fees (0.50 percent compared to 1.5 percent) would leave you with a balance that is 17 percent higher. “People don’t realize what seems like a small difference can in fact make a sizable difference over the long-term,” says John A. Turner, a leading retirement policy expert currently the director of the Pension Policy Center. Part of the problem is that current regulations do not require 401(k) plans to spell out their fund fees. Legislation mandating fee disclosure stalled in Congress last year, but Turner believes it could become a reality soon. That could be the biggest retirement assist Washington can give Americans without adding a penny to the deficit. 

In the meantime, here’s what you can do:

• Search for the lowest cost funds in your plan. You may be stuck with the menu of funds offered in your current employer’s plan, but that doesn’t mean you must choose the costliest. Find at least one fund with a low annual expense ratio; if your plan doesn’t broadcast this info, contact customer service and ask.

If you discover you own expensive funds, it’s time to get strategic. Recognize that it is not necessary to have a perfectly diversified 401(k) across the various asset classes. All you need is a well-diversified overall retirement portfolio. That means you can overload your 401(k) assets into the lowest cost investment option. For example, if your plan’s least costly fund is a bond fund, then make that the focus of your 401(k). You can then adjust your other investments so that your portfolio has an age-appropriate mix of stocks, bonds and cash, both domestic and global.

• Move old 401(k)s into low-cost IRAs. When you leave a job, voluntarily or not, you are allowed to move your 401(k) too. If you have great low-cost funds that have performed well, it can make sense to stay put. But if the annual expense ratios you pay are one percent or higher, moving your money into a Rollover IRA and investing in index mutual funds or Exchange-Traded Funds that charge less than 0.50 percent means more of your money is working for you.

4. Base your investment mix on life expectancy, not retirement.
Many pre-retirees who invested in target retirement funds - portfolios designed to hold an age-appropriate mix of stocks, bonds and cash - were surprised the funds lost 25 percent or more in the 2008 bear market.  That triggered hearings in Washington on whether target funds were too aggressively invested. But the reality is that today’s 65 year olds can expect to live another 20 or so years, on average (meaning half will live even longer). If you shift 100 percent of your retirement portfolio to a conservative bond and cash portfolio when you retire, you are setting yourself up for the hidden risk of losing ground to inflation.  Now that doesn’t mean you want to overload your stock allocation either. What you want is an age-appropriate mix of stocks, bonds and cash that is designed to generate returns that can help support you all the way through retirement. 

Here’s what you can do today:

• Subtract your age from 100. That’s a pretty good target for how much you want to have invested in stocks. If you have a family history of longevity, consider subtracting your age from 110. If you are invested in a target retirement fund and its allocation has far more riding on stocks, you can either switch to other options within the plan, or consider counterbalancing that fund by investing more conservatively in your other retirement accounts.

5. Don't cash out when you change jobs.
More than four out of 10 individuals who leave a job take a cash distribution, according to benefit consulting firm Hewitt Associates. If you truly need the money for a severe hardship such as medical expenses, taking the cash may in fact be necessary. But it should be viewed as a last-resort move that has an immense opportunity cost. For example, a 30-year-old who cashes out a $25,000 401(k) balance will net just $16,250 after paying income tax (at an assumed 25 percent federal rate) and the 10 percent early withdrawal penalty typically charged on withdrawals made before age 59 ½.  If, however, the $25,000 stays invested for the next 35 years and earns an annualized return of 7 percent, it would be worth more than $265,000 in retirement savings at age 65. 

What you can do today:
• Build an emergency savings fund at a federally insured bank or credit union.  That will reduce the pressure to tap your 401(k) before you retire. Leaving your money to grow for decades is the ticket to a comfortable retirement; your retirement security is riding on how well you manage your 401(k) today so it can help support you later.