For a start, total contributions to DC schemes, from employers and employees, are much lower than those made to final-salary plans. That implies DC pensions will be lower than final-salary ones. Secondly, workers seem to overestimate the income they can draw from a given pot of money (to put it another way, they underestimate the pot they need in order to generate a given income.)

Individuals in DC schemes face exactly the same pressures as the companies or public-sector bodies that offer final-salary pensions. People are living longer and interest rates (in both real and nominal terms) are lower, which makes buying a pension dearer.

Companies have been forced to recognise this by changes in accounting rules. That is why so many firms have stopped offering final-salary pensions. But workers may not realise the extent of the problem they face.

In Britain, where many people buy annuities, a 65-year-old retiree who has amassed what might seem like a sizeable pot of £500,000 ($760,000) can convert that into an income of £29,500 a year, according to the Annuity Bureau. But that offers no protection from inflation. At an inflation rate of 3%, the purchasing power of that income will halve in 24 years. Opting for an inflation-linked annuity cuts income to just under £17,000 a year.

Pension pots of that size are not the norm. In America, where DC plans are much more common than in Britain, the average pension pot at end-2011 was just $59,000 and the median was $16,649.

Although members still have time to save for retirement (only 10% are aged over 60), they have to get their skates on: their median age is 45. Many will be forced to retire later than they expected or risk burning through their money before they die. Even the commonly used withdrawal rate of 4% a year might be too high for a world where Treasury bonds yield only 2.5%.

As Robert Merton of the MIT Sloan School of Management argues in a new paper, the right way to think about a pension boils down to four questions. What is the worker’s desired retirement income? What is the minimum acceptable income if the desired level cannot be achieved? How much is the worker willing to contribute? And when does he want to retire?

The first priority is to ascertain the minimum level of income. State benefits will supply some income but not as much as many people would like: everyone has heard stories of elderly people too poor to turn on the heating in winter.

So Mr Merton thinks the worker should try to guarantee that minimum level of income with at least a 96% level of probability. Only once that goal has been achieved should the remainder of pension savings be invested in a way to achieve the desired level of income. Pay the gas bill first, in other words, and then think of the world cruise. The only way to guarantee the minimum level of income is buying inflation-linked government bonds. These should be the building-blocks of a pension portfolio.

Mr Merton set up a firm a few years ago called Smartnest (now owned by Dimensional Fund Advisers) which aims to guide workers through this process. When employees fall short of their retirement goals, they need to start saving more or agree to retire later.

The past few years illustrate the dangers for those people who focus on the size of the pot, not the income that can be earned from it. Equity markets have rallied, giving a boost to pension assets, but because bond yields fell sharply, prospective pensioners ended up worse off. For proof look at the pension schemes of American firms in the S&P 1500, which were just 74% funded at the end of last year, according to Mercer, a consultancy.

Conversely, the stockmarket decline since late May could depress DC scheme members as they look at their statements. It shouldn’t. Just as the funding status of corporate schemes improved over the month because bond yields rose, so the pension pots of DC members will now buy a higher income than before. Workers should be praying for a bond bear market.