Alicia Munnell examines financial needs for retirement and how the recent market downturn has tarnished the prospect of "the golden years" for many Americans. She has been on the President's Council of Economic Advisers and worked as an assistant secretary of the Treasury for Economic Policy. She spoke to Judith Schoolman about retirement planning.

1. You conclude that the nation needs more retirement savings. What advice can you give to financial advisors?

The systems that are in place now—Social Security and 401(k)s—are not enough to maintain levels needed to finance retirement. We need an additional tier. This tier needs to be introduced by the federal government and managed by the private sector, such as financial services firms. This tier would be a buffer between Social Security on the bottom and 401(k) plans on top. Remember, the 401(k)'s original role was as a supplement to Social Security and defined benefits. One way to improve retirement savings is to consider how long you will work and postpone getting Social Security benefits. If you can work until 70 and not tap in at 62, that would help. It also gives you eight more years for your 401(k) to grow.

2. In order to thrive in one's "golden years," many workers will need to replace up to 72% of their incomes. You say that many won't be able to do this. Why?

Retirees will need less than their full working income because they don't need to travel for work or buy work clothes. They also won't have to pay a payroll tax and won't have to pay taxes on Social Security or a pension. But our concern is that people won't be able to reach that 72%, what we call the target rate, because of the decline in equity investments and interest rates, which affect pensions and home values.

3. How should people maintain a pre-retirement standard of living and when do you start planning?

A person should do it at an early age, such as their 40s or 50s. And remember that you won't need to replace the full amount; 65% to 75% is where you want to be. Consider whether your mortgage is paid, whether all your kids are out of school. The problem could be medical expenses. Most people have health insurance through an employer through age 65. Then there is Medicare, which pays a base amount. The real concern is to not be left without insurance between working and Medicare.

4. You have calculated that high-income groups have the biggest percentage growth of being at-risk households since 2004. Why?

High-income groups are at risk because they have equities to a greater extent than middle and lower income groups. But both middle and high-income groups have really been punished by the fall in housing. We always looked at housing as an important part of retirement money. People looking at retirement may have to tap even more than expected into the home equity to make up for the decline in Social Security benefits and employer retirement payouts.

5. What is the likely outcome if the financial crisis hastens the decline of defined benefit retirement plans in the private sector?

Defined benefit plans in the private sector are on their way out. Right now, 17% of workers have a defined benefit plan, down from 62% in 1983. Some 63% have defined contribution—401(k) plans—up from 12% in 1983. This shows that we need to make 401(k) easy and automatic. One concern, however, is that we need to look at how money is taken out. If it's taken out too fast to help with household expenses, there will be penalties for early withdrawal and also inadequate funds during retirement. If it's tapped into too slowly, households may not meet their needs.