Your Retirement Is Now a Lot More Complicated

Retirement is supposed to be that time when you slow down, relax. You've spent your whole life working, saving, and investing; in retirement, it's time to take it easy. After all, how much can change with something as boring and staid as retirement?

Quite a lot, actually.

A successful retirement requires the smart coordination of a lot of moving parts, and those parts don't always move quite the way they did in the past. In the last 15 years, retirement has changed substantially -- and in ways that have changed how you should approach it.

1. We're living, and working, longer
Back in 1889, when German Chancellor Otto von Bismarck created the first government pension program, the retirement age was 70. Back then, if you reached age 50, the average life expectancy was 72. If a typical worker began a full-time career at age 16, he worked for 54 years to fund two years of retirement.

Fast-forward to today, and a college graduate begins work at age 22, retires at 62, and lives to 82. That's 20 years of retirement, supported by only 40 years of work.

As we've become wealthier, we've decided to retire sooner -- even though we're living longer. And at no time did people feel wealthier than during the 1990s, which saw a wave of early retirements. Alas, for many, it did not last.

In fact, the past few years has seen the first significant uptick in the average retirement age. It's not horrible news; there are worse things than having to work longer due to living longer. But you need to factor it into your plan. If you don't have enough to retire as soon as you'd like, put some time into finding a career you might actually enjoy.

2. We're on our own
You know this story: Over the past 15 years, employer-sponsored retirement accounts have changed. The most common used to be the defined-benefit plan, more commonly known as a traditional pension. However, such plans are in decline, and have been eclipsed by the rise of the defined-contribution plan, such as the 401(k), 403(b), and Fahrenheit 451.

Just kidding on that last one, of course, though many workers with defined-contribution plans have the feeling that their retirements are going up in smoke. The shift to 401(k)s has made investment managers of us all. Now, we at The Motley Fool think this can be a good thing -- for those of us who take the time to learn how to manage our own money. But for the average person, this isn't working out so well. Several studies have found that defined-benefit plans, managed by professionals, outperform defined-contribution plans.

Your job, dear Fool, is to make sure you're taking control of your financial future by managing your 401(k)s and IRAs in the best way possible. One solution is found in our next item.

3. The emergence of target retirement funds
One of the only good things to come out of Wall Street over the past several years is the target retirement fund, which automatically allocates an investor's assets based on when the money is needed; someone retiring in 2040 will have more stocks than someone retiring in 2020, given the longer time frame. The funds automatically rebalance the allocations, and get gradually more conservative as the target date approaches.

This is essentially what any financial advisor or pension manager would do for you, and -- if you choose lower-cost options from the likes of Vanguard and T. Rowe Price -- you can get it all for much less than a financial advisor would charge. Just know that target retirement accounts still have stocks, which means they've lost a lot of money over the past year (though not as much as an all-stock strategy), and they don't guarantee that you'll actually have enough money on the target date to retire.

4. Social Security and Medicare are not getting healthier
Over the past 15 years, nothing has been done to shore up Social Security; the system still won't be able to pay for all its promises. By 2017, the program will have to pay more than it takes in via payroll taxes.

But the program's liabilities are nothing compared to those of Medicare, which is already spending more than it takes out of Americans' paychecks. According to a report published by the Government Accountability Office in January, the government's obligations for Part D of Medicare (prescription-drug coverage) alone exceed the unfunded obligations of Social Security.

Add it all up, and the present value of the money the government needs to cover its future obligations is $53 trillion -- or $175,000 for every man, woman, and child. And that's why experts think tax rates have nowhere to go but up. Which is why it might be smart to take advantage of ...

5. The creation of the Roth
Traditional IRAs and 401(k)s have been around since the 1970s. Contributions are generally tax-deductible, and any investment earnings aren't taxed until the owner withdrawals the money.

Then along came the Roth IRA (named after the late Senator William Roth) in 1996, and the Roth 401(k) in 2006. The Roth reverses the tax breaks; you don't get a tax deduction on your contributions, but withdrawals are tax-free. If the option is available to you, contributing to a Roth is a great way to hedge your retirement against future higher tax rates.

6. Inflation isn't dead
According to Ibbotson Associates, inflation was just 2.8% in 1993, and it stayed in that general neighborhood for several years. As recently as 2003, inflation was just 1.9%. For many years, few people worried too much about inflation.

But that has changed. Last year, prices rose 4.6%, and they have risen at an annualized rate above 5% this year. That puts a hurting on both those who are still saving for retirement -- since paying more for goods and services leaves less for IRAs and 401(k)s -- and those who are already retired, since their portfolios may not be able to cover rising costs. Put it all together, and something that cost $100 in 1993 would cost almost $150 today.

What to do? Retirees should invest in Treasury Inflation-Protected Securities (TIPS) -- something else that wasn't around in 1993 -- the principal of which is adjusted upward to keep up with inflation. You can buy them directly at TreasuryDirect.gov, or through a fund such as the Vanguard Inflation Protected Securities Fund (FUND:VIPSX) or the iShares TIPS (AMEX:TIP).

The other hedge against inflation is stocks. I know, right now the Dow is about where it was more than a decade ago. But don't focus just on capital appreciation (or lack thereof). Keep cash flow (i.e., dividends) in mind too. Check out how much the payouts of these stocks have grown over the past 15 years:

That provides inflation-beating income to retirees, and supercharged dollar-cost averaging for those who are still working and reinvesting their dividends.

Retirement 15 years from now
The bottom-line lesson from the past decade-and-a-half is that retirement planning is increasingly up to us. Our employers and our government have a lower inclination and ability to do it for us. The only people who will have truly secure retirements are those who take control of their financial futures.

If you'd like help getting your head -- and your hands -- around your retirement, try our Motley Fool Rule Your Retirement service free for 30 days. It offers model portfolios, overviews of different asset classes, and, now, a five-week video series, "The Five Steps to Ruling Your Retirement." Just click here to get started -- there's no obligation to subscribe.

Robert Brokamp is the advisor for the Fool's Rule Your Retirement service. Robert doesn't own any of the stocks mentioned in this article. Pfizer, Wal-Mart, and Coca-Cola are Motley Fool Inside Value selections. Pfizer and Johnson & Johnson are Income Investor picks. The Fool owns shares of Pfizer and has a disclosure policy.