The Ultimate Retirement Safety Net

Folks with traditional pensions have long had a tremendous safety net that the rest of us lack: the Pension Benefit Guaranty Corporation (PBGC). For folks whose insured pension plan is terminated in 2008, the PBGC will pay up to a maximum of $51,750 per year for those who retire at age 65.

The fly in that ointment, though, is that the PBGC is itself terribly underfunded -- to the tune of $14 billion. As it turns out, the insurers of last resort themselves need a bit of help. So where are they turning to better assure they can meet their long-term funding needs?

The same place you should -- stocks
That's right: stocks. The PBGC is raising its target stock allocation to 45%. Why the switch? Over long periods of time, it's a higher-return, lower-risk strategy than its previous target of only keeping 15% to 25% in stocks.

There are three primary reasons why everyone with a time horizon longer than just a few years should own at least some stocks:

• Better long-term return potential
• Better reinvestment options
• Better inflation protection

Once you expand your time horizon, it's easy to realize that you face risks that go far beyond simply assuring you keep as much as you had when you started. If you want to maintain your lifestyle, you need to protect yourself against inflation. The better long-term dividend and principal growth potential that stocks offer can help you emerge from that battle victoriously.

Plus, if you expect to live long enough, you'll need to reinvest the principal from your maturing bonds. If interest rates happen to be lower when you need to reinvest that money, your future income will suffer. The potentially infinite lifespan of a corporate equity can help dampen that risk as well.

Make it easy on yourself
Of course, it's hard to pick the right stocks. Unless you have a tremendous aptitude for it, chances are that you won't outperform the overall market over any long periods of time. So make it easy on yourself, and buy the market instead. Buying a fund that tracks a broad index like the S&P 500 gives you the long-term benefits of stock ownership without the worry and hassle of picking individual stocks. You also get built-in diversification to protect you from the risks any one firm or industry's troubles could totally destroy your nest egg.

Take a look at the broad swaths of American industry you own simply by buying a single index-tracking fund:

You're in good company if you choose to go this route and get your stocks through an index fund. It's essentially the same strategy that the PBGC uses itself. If it's good enough for the people that provide the backstop against pension failures, then it's probably good enough for the rest of us, too.

Your total retirement picture
If you've never thought that owning stocks could lead you to a safer long-term portfolio than staying entirely in bonds, you're not alone. It's a common misconception with the unfortunate effect of hurting you the worst when you need your retirement money the most.

If you want to have the best retirement you can, you'll need to make the most of all the resources you have available. At Motley Fool Rule Your Retirement, we help subscribers put together a plan to ensure a happy post-work life. For strategies, advice, calculators, and our "How to Plan the Perfect Retirement" online seminar, join us today to learn how else you can improve your own retirement safety net. A trial is free for 30 days without obligations to subscribe.

At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. 3M is a Motley Fool Inside Value recommendation. The Fool's disclosure policy works without a safety net. It's not as dangerous as it seems, though, since it never gets more than three inches off the ground.