When planning for retirement, many Americans think about their pay the way they used to think about the value of real estate or stocks: that it will always go up.  They are mistaken. It turns out that the average person's pay plateaus in his 40s, according to the latest data from the U.S. Census Bureau. Many people also assume they will be gainfully employed until the day they turn 65, or 62, or whichever age they plan to retire—but if they lose a job in their 50s, finding another at the same salary is difficult.  Americans are an optimistic lot—but when it comes to important financial goals such as retirement, caution is warranted. During the past few years, people who put all their money into stocks hoping for big gains or assumed their houses were piggy banks paid a steep price for their exuberance. Wages should be treated with similar skepticism: What is here today could be gone tomorrow.  If you are among those who have been assuming too rosy a future, you need to rethink virtually every aspect of your retirement plan, from the amount you can sock away each month and your investment allocations to the year you can realistically expect to retire and even the amount of Social Security you are likely to receive. What would happen if you suffered a 30% pay cut or found yourself out of work at, say, 60—five years earlier than you expected? Would you be prepared?  "You have to be wary of building in lofty expectations," says Paul Palazzo, managing director of New York-based Altfest Personal Wealth Management. He urges clients to assume the only salary increases they will win are cost-of-living adjustments.  The numbers bear him out. Data from 2009, the most recent available from the Current Population Survey, a joint effort between the Bureau of Labor Statistics and the Census Bureau, show that income grows at a steady rate for people in their 20s and 30s. No surprise there. But once people hit midlife, the good times are over. The 40s are the peak earning years for most, when the median income for men working full-time hovers between $52,000 in their early 40s and about $54,000 in their late 40s. After that, median income barely budges—it's still $54,000 for men aged 50 to 54. In other words, there is a 15-year plateau.  "Cost-of-living adjustments are about all they can count on after they enter their 40s, and a lot of people aren't even getting those," says Cheryl Russell, a demographer and editorial director for New Strategist Publications, a demographic data and analysis firm. Indeed, according to government statistics, the median earnings of men who work full-time fall 10% as they move from their peak earning years toward their retirement years. "So even if you continue to work long after you're eligible for Social Security, you can't count on a rise in your earnings," Ms. Russell says.  It is tempting to think this is mainly a problem for lower-wage workers, but it also is a fact of life for higher-income managers and other professionals, say financial planners.  "The stagnation in salaries has hit all varieties of workers, from executives to middle managers," says Brandon Ross, senior vice president at Dallas-based Peak Capital Investment Services. "That makes retirement planning more difficult."  For example, the young manager who reaches $150,000 a year by age 45 might think his pay will keep zooming—and set his retirement strategy accordingly. But it's likely only to keep pace with inflation thereafter.  What's more, if he loses his job while in his 50s, it will be increasingly difficult to find another. The unemployment rate for persons 55 and older increased sharply since the beginning of the recession in December 2007, and reached record-high levels in 2009, Bureau of Labor Statistics data show. And once jobless, older workers remain unemployed longer, according to BLS data.  It's especially difficult to find a high-paying job these days. According to a February analysis by the National Employment Law Project, a New York-based advocacy organization, only 14% of the job gains in the 12 months since the recession's end were in higher-wage industries, compared with 49% for lower-wage industries.  The simplest way to prepare for lower pay later in life is to save more, spend less or both right now. If you behave as though your income has dropped by 20%, you can set aside the rest for retirement.  Vern Pope, an engineer, always assumed he was on the path to a comfortable retirement. Two years ago, the computer-manufacturing company in Rapid City, S.D., where he had worked for 30 years closed down. Unable to find a job for a year, Mr. Pope, 55 years old, settled on a position last year that pays 25% less and forces him to live away from his wife during the week.  "I always thought that my salary would continue to rise," Mr. Pope says. "I never expected this."  Such tales are common. According to a May survey of older workers by AARP, 36% have stopped or cut back on their saving since the recession began, while 25% have exhausted their retirement savings.  Several factors are driving the trend toward older people earning and working less, from the sour economy to downsizing and the fact that employers have been moved to more "performance-based" pay, which often translates into smaller pay increases, as well as pay freezes.  While the financial crisis and recession have exacerbated the trend, it isn't new. IRS filings for pension plans show that a decade ago, large employers assumed steep drops in the rate of salary growth as employees aged. Boeing Co., Hershey Co., Sears Holdings Corp. and Xerox Corp., for example, assumed salaries for a 25-year-old would increase by 7% to 13% a year, but that the rate of increase would fall steadily thereafter, generally reaching the 3% range by age 50. With inflation, this means that salaries remain flat in one's final decade or two on the job.  Greg Scott, a senior executive at telecommunications giant Verizon Inc. with 30 years at the company, saw his salary plateau in his early 50s. In 2007, when his pension was frozen, he opted for a buyout, figuring it was certain compensation in an uncertain economy. Now working as a senior vice president of marketing at a credit union, Mr. Scott, 57, who lives in Grapevine, Texas, is making roughly half of what he earned in his old job.  "The things that were certain before the recession are just not certain anymore," Mr. Scott says.  Popular retirement-planning software often reinforces people's lofty expectations. A 2009 study by the Pension Policy Center, a Washington-based nonprofit, examined 12 popular Web-based retirement-planning tools, including those offered by Fidelity Investments, AARP and MetLife Inc., and found that "none of them assume wages might decline," says John Turner, who heads the nonprofit. "That is a flawed notion."  One of Fidelity's calculators, for example, assumes that salary will rise by 3.8% a year until retirement but that inflation will be only 2.3% a year. It is modeled on data from the 1980s to the 2000s, says Chris McDermott, Fidelity's senior vice president for retirement and financial planning.  The tools do allow investors to tinker with the assumptions manually, Mr. McDermott says, but pay growth can't turn negative. "It's a default assumption," Mr. McDermott says. "We want people to be able to play around on their own. It's about engaging them in the conversation."  A surprise pay cut later in life also can lead to lower Social Security benefits. If someone who turned 66 in January 2011 had earned the maximum amount covered by Social Security since 1975 ($14,000, rising to $106,800 today), he would get the maximum benefit, about $28,400 a year. If his earnings in the final 10 years fell to $50,000, the person would receive $26,300. And if he made the maximum amount for 30 years, then lost his job and didn't work the final five years, the benefit would be $26,240.  These drops may not seem drastic, but when combined with lower savings rates they can squeeze retirement spending more than many people expect, says Jean Fullerton, a financial adviser in Bedford, N.H., who ran these calculations.  For people who earned a decent wage during their early working years, Social Security might not be affected much by a late-career pay swoon. That is because the benefit is based on one's 35 highest-earning years, inflation adjusted. So the $14,100 earned in 1975 counts as $58,238 in today's dollars credited toward your benefit, says Ms. Fullerton—which means that recent years at little or no earnings could be filled in with earnings from your 20s.  On the other hand, people who worked their way through college or graduate school before landing their first professional job, toiled for years at low wages before striking it big in their 30s and 40s, worked overseas for long periods for non-U.S. employers or dropped out of the work force to raise families won't gain as much from those early working efforts.  For many people, their current retirement-savings strategy is merely a best-case scenario. You should also identify a worst-case scenario—such as a 20% pay cut during your final 10 years in the work force. Then, you could try to live on that lower income and put the rest into savings. If your disaster scenario plays out, you will be prepared—and if it doesn't, you will be sitting on a bigger pot of gold come retirement time.  Of course, this approach might require you to forgo such dreams as footing your kids' college bills. One alternative: Tell your kids to take out student loans, and promise to pay them off if you are able to make it to retirement unscathed.  Another way to build savings as long as possible is to delay retiring, even if it means working for lower pay. The longer you remain in the work force, the longer your savings will last and the higher your Social Security payments will be. Someone receiving $1,700 a month at age 62 might receive $2,400 a month at 66. If he delayed taking Social Security until age 70, he would receive delayed retirement credits that would boost the monthly payments to $3,200 a month.  This year, the Social Security Administration stopped issuing annual statements of estimated earnings, but it provides an online tool at www.ssa.gov/estimator that lets you see the benefit you have earned thus far and plug in estimated retirement ages and various scenarios for your future earnings, whether greater or lower.  When you turn 50 or so, you should assess your employability. If you anticipate difficulty keeping a job in your industry, you might even consider getting into a second profession. "Changing careers, almost anyone would take a financial hit, so they either need savings or a working spouse to make the transition," Ms. Fullerton says.  Ms. Fullerton took that calculated risk at age 50. She had a comfortable job as a software engineer at Digital Equipment Corp., but worried that it couldn't last. "The workload was doubling as the company cut back, and more jobs were being outsourced to India," she says. So while working, she took courses at night and became a financial adviser. She now is financially as well-off as she was before, and has greater job security.  For the same reason, you should delay taking a monthly pension until your company's full retirement age, advisers say. And when you do begin taking it, make sure your employer isn't shortchanging you.  Many large companies estimate what you will receive in Social Security benefits and subtract half that amount from your pension. But they may overestimate what you will receive from Social Security, reducing your pension too much. That is because they assume their current and former employees work 35 years and that their pay grows at a certain rate. You have the right to have your employer calculate your pension using your actual earnings history.  Such strategies might seem like a radical departure from the classic "save 10% of your income" strategy financial advisers used to push. Then again, "all the maxims of retirement have totally changed," says Mr. Scott. "You can't play by the same old rules."  Write to Ellen E. Schultz at ellen.schultz@wsj.com and Jessica Silver-Greenberg at jessica.silver-greenberg@wsj.com
Surprise: As people age, their wages tend to fall, not rise. Here's how to adjust your retirement plan accordingly.