Most employees are not ready for retirement.

That’s the conclusion from Retirement Preparedness Report, a study by the financial education firm Financial Finesse. According to the report:

• Most employees have never run a retirement projection despite their income or age. Fifty-seven percent of employees at pre-retirement age, between 55 and 64, said they had not run a calculation to estimate whether or not they were on track to replace 80% of their income annually (or their goal) in retirement. This number grew with younger generations: 68% of employees age 45-54, 67% of employees age 30-44, and 73% of employees under 30 indicated they had not run a retirement projection and didn’t know if they were on track to retire.
• Employees who don’t know if they are on track to retire don’t fare much better than those who know they are not on track. Employees who are on track to retire have an average financial wellness score of 7.2 out of 10, and have sound money management skills. Those who are not on track scored far lower with a 4.2 financial wellness score and those who don’t know whether they are on track or not scored only slightly higher with a 4.7 financial wellness score.
• Basic money management skills are essential to employees’ retirement preparedness. There are significant correlations between retirement preparedness and having an emergency fund, having a plan to pay off debt, and paying credit card bills in full.

Companies can definitely help employees along that road to retirement.

• Offer an retirement plan, whether it be a defined-contribution plan such as 401K, a SIMPLE IRA, or a SEP IRA, or a defined benefit pension plan. 
• Have an opt-out instead of an opt-in retirement contribution system. Instead of having employees joining a 401K, set up the system so that everyone is automatically enrolled unless they chose not to. Studies have shown that people tend to follow the path of least resistance. 
• Provide a matching contribution. This will further incentivize (or it should!) employees to contribute to their retirement fund.
• Select a 401K provider who offers low-cost index funds or managed funds with reasonable fees. High fees eat into performance, and most adversely affect long-time employees.
• Teach employees about the benefits the company offers, such as any financial counseling, health spending funds, or discounted entertainment options. This action will not only help employees take advantage of these benefits, but also help them appreciate the full scope of their compensation.

I am very grateful that both my employer and CB’s employer offers defined contribution plans for us, so we can partake in tax-advantaged savings. CB’s employer also makes a significant contribution to his retirement plan every month, which is an added bonus. The days of an employee working for the same firm for 30 years and then retiring with a good pension and a gold watch is over. We both know that despite the fact our companies are helping us towards retirement – saving is ultimately our responsibility. That’s not to say companies can’t help their employees along, though!

Congratulations, you got a raise! Now what?

At my annual performance review, I received a good-sized raise that translates to $200-$300 a month, depending on how 401K and taxes shake out. While the raise was a couple of percentage points lower than what I had asked for, I am appreciative and happy about it all things considered. I am happy that I got this raise and I am happy that my contributions at work are being recognized. On the personal finance front, this raise will go a long way in helping me meet my goals for 2011.

Now, what to do about this extra money? No matter what I do, I don’t want to fritter this raise away. I worked really hard this past year to earn this raise, and I want the extra money to work hard for me too.

Here are 5 great ways to spend a raise:

1. Save the raise for a retirement

If I weren’t already contributing the maximum to my 401K or Roth IRA, retirement is the first place I’d look. Banking the raise is a relatively painless form of saving (after all, you’ve already managed to live without it, right?), and even if you only increase your current contribution levels by a percentage or two, your retirement fund will still reap benefits down the road. New York Times has a nifty tool called The 1% More Savings Calculator to show the fantastic effects of increasing savings by just one more percentage point (or even better, another percentage point a year up to 16%).

2. Pay down debt

If you have high-interest rate debt such as credit card debt, use this raise to accelerate your payment. The interest offered by banks and credit unions are so low right now that whatever money you can put to debt will probably save you money in the long run. Mortgage, credit card, student loans, car note- a raise can help get rid of these debts faster and save you hundreds or thousands of dollars in interest payments. I still have $12,000+ in student loans, but because they are zero-interest loans, it doesn’t make sense for me to pay them back early.

3. Bulk up cash savings / emergency fund

It’s rare that you will find yourself in an emergency and say, d’oh! I have too much cash. (If you are that person, then please, I’d like to have your problem). So I could put the raise into my general cash fund (i.e. my Freedom Fund) which is basically earmarked for graduate school. A few hundred dollars a month can add up quickly, especially if I am consistent with the saving.

4. Save the raise for a big-ticket purchase

I could start putting more money into the Galapagos Fund. Once I get engaged, I might want to start saving for a wedding. But I don’t want many big-ticket item (not even a wedding) that much, other than expensive and glorious adventure travel.

5. Invest in yourself

If there are workshops, coaching, or materials that will help you become more successful, take some of that hard-earned raise and reward yourself. If you need to update your wardrobe, do so (even though it’s not strictly a monetary investment!).