A recent study suggests that most Americans are woefully unprepared for retirement. But if you take steps now, you may very well end up in the happy minority who are ready to enjoy their golden years in comfort and financial security.

In "Does Financial Sophistication Matter in Retirement Preparedness?" an article recently published in the Journal of Personal Finance, the authors attempt to determine the factors that contribute most toward retirement readiness, and they provide a progress report on the retirement readiness of U.S. households as of 2010. Based on previous research, the authors went into the study assuming that:

  • Financially sophisticated households were more likely to achieve retirement adequacy than financially unsophisticated households.
  • Those with higher education were more likely to be prepared for retirement.
  • The use of a financial planner can increase one's chances of retirement preparedness.

In general, the research supported these assumptions.

Respondents who were found to be unprepared for retirement include those who take excessive risks, expect to retire before age 62, do not hold a high school diploma, or are single females. When it came to the retirement readiness of all U.S. households (as of 2010), the authors concluded that only 44% of households with a working household head between the ages of 35 and 60 were adequately prepared for retirement.

This tells us that in finance, as in so many other areas of life, knowledge is power. It's easy to run about like Chicken Little and bemoan the falling sky when it comes to our retirement readiness. It's much easier to do nothing and say that because you don't have a Ph.D., you're sunk.

But as I tell many people who come to me for financial planning, you can't set your GPS if you don't have a destination address. Your first step in assessing your retirement readiness is to figure out your destination -- how much money is enough? Compile a budget for your pre- and post-retirement spending. Don't just estimate; actually figure it out as closely as possible.

Drawing the road map
Your next step is to determine what amount of retirement savings, along with Social Security and any pensions, will provide that income for you. This is where the help of a real financial planner may come in handy. A financial planner should be able to tell you with a reasonable degree of certainty how much retirement savings you will need to make your equation work (and if they can't, then find another one).

What's that? You say you can't afford a financial planner? While hiring a financial planner is an up-front expense, any financial planner worth their salt will make you money over the long run. If your financial planner doesn't save you money, then find a new one. Often a planner can help you make quick and easy changes that end up saving you lots of money. For example, my clients Ben and Sharon felt they needed to have a large pot of cash close at hand just in case. They kept this pot at their local bank in an account that paid around 0.10% (that's 10% of 1%). I worked with them to put those funds in a money market at another bank that paid 1%. We also set up a ladder of CDs, which is an array of CDs maturing at different times (three months, six months, one year, etc.) so that there is always a pot of cash ready to come due if needed. Lastly, we decided that their reserve funds did not have to be so big, so we took out some of that cash and invested it, because over the long term, nothing beats equity when it comes to growth and inflation protection. Just these few suggestions made my clients enough money to pay my fees and then some.

The moral here is if you are part of the 56% of households that are not yet ready for retirement, then there's no time like the present to get there. You know the first step: prepare a budget and fire up your GPS. The next step may involve a financial planner. There are many places where you can find a planner who works on a fee-only basis and will write a financial plan for you. Here are a few websites where you can start your search: CFP Board, Betterment, NAPFA, and Financial Planning Association.