Although Americans are saving more for retirement, they are still falling short of being adequately prepared due to rising healthcare costs, longevity and dwindling pension funds.

Americans are on track to replace 58% of their income in retirement, a minute increase from last year's 57%, according to Fidelity Research Institute's annual Retirement Index report, released last week.

Data for the index is gathered annually through an online national survey of more than 2,000 Americans who are working full-time, over 25 years old with a household income of more than $20,000.

"We're encouraged by the fact that there are steady, but slight, steps being taken by people to prepare for retirement," said Guy. L Patton, executive director of Fidelity Research Institute.

The average American will have to take a 42% pay cut in retirement, Patton said. The 77 million Baby Boomers are on track to replace 62% of their pre-retirement income, and pre-retirees, those aged 55 and over, are set to restore 61%, the report found.

Pre-retirees should be in full planning mode and still have a little time left to take action and catch up on their retirement savings, Patton said.

Planning and awareness of the need to save for retirement has caused 42% of respondents to take action within the last six months, he said. Twenty-five percent of Americans reallocated their portfolio, 21% significantly increased their workplace savings plan and 20% sought advice from a financial professional.

Not having enough money after paying everyday living expenses, procrastination, and extra money being spent to pay down credit card debt were the reasons most commonly stated for not allocating money to retirement plans, the report found.

Generation Xers, those age 25 to 42 years old, have the lowest amount of money saved for retirement, and one in five haven't begun saving for retirement yet, Fidelity discovered.

"This group is juggling their own debt, putting children through college and taking care of their parents," Patton noted.

Ten percent of Generation Xers provide financial support to their parents or in-laws, which is hindering their ability to save for retirement. Typically, $3,500 is spent annually on parents' expenses, such as food, utilities and healthcare.

Many Americans are defining the success of retirement by their health. Health-related issues may have a serious impact on retirement plans, Patton said. Nearly a quarter of Americans retired early due to unexpected health-related issues.

Forty-eight percent of workers consider the cost of healthcare to be the greatest risk when planning for retirement, more so than outliving their savings or the impact of inflation. Among Baby Boomers, the concern is higher, with 54% worrying about healthcare costs.

"People who are thinking ahead will start saving for medical expenses and recognize that the cost of living a healthy, active life is going to increase," said David Wray, president of the 401(k) Profit Sharing Council in Washington.

On average, working Americans have $22,500 total household retirement savings and expect to receive $29,500 annually in Social Security payments. Twenty percent of all workers and 33% of pre-retirees expect Social Security to be their greatest source of income.

For extra income in retirement, 63% of workers plan to work part-time, 23% are relying on an inheritance from their spouse, and 21% hope the sale of their home will provide extra income.

Older Americans will have an opportunity to continue working in the future because the workplace will be short of high-quality workers, Wray commented. Additionally, people are going to live for a very long time and will want to be engaged in the workforce, but work fewer hours, he added.

Working in retirement is a good way to supplement income; however, people cannot rely on working or control their ability to be able to work, Patton acknowledged.

Retirees for the most part are content and enjoying retirement, with 49% stating they are extremely or very satisfied in retirement overall and 40% conceding that retirement is more enjoyable than they expected, according to Northstar Research Partners, which conducted an online survey of 793 retirees age 55 or older, on behalf of Fidelity.

The average retiree surveyed was 70 years old, and has been in retirement for eight years. Reasons retirees reported retirement being less pleasing than anticipated were due to financial burdens and/or health problems.

Despite the enjoyable life most retirees are living, retirement can get expensive. Before retiring, 82% of retirees expected their monthly expenses to mirror or decrease their pre-retirement spending. In fact, though, 39% stated their expenses increased in retirement.

Due to the high cost of retirement, 48% made a major lifestyle change such as downsizing their home, moving to a different area of the county, starting a part-time job or reducing healthcare expenses by decreasing medical visits and prescriptions.

Looking back on pre-retirement days, retirees admit that they would have taken more steps to better prepare financially for retirement, the report found. Thirty seven percent said a top regret was not starting an IRA earlier, while 29% cited accumulating too much debt.

"Americans need to make progress, and there certainly is still a fair amount of work to do," Patton said.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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