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Save Your Retirement From Certain Doom

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For decades, millions of people have counted on Social Security as their primary source of income during retirement. But as economic conditions continue to deteriorate, the prospects for Social Security are looking increasingly iffy -- and counting on it to provide the income you depend on after you retire could be the worst financial move you ever make.

Is the end near?
Last week, the Social Security Administration released its annual update on the status of the Social Security and Medicare programs. The news was mixed, as the report gave a favorable update of Medicare's solvency. Attributing gains to changes resulting from health-care legislation passed earlier this year, Medicare is now expected to remain solvent until 2029, as opposed to the 2017 date that was predicted last year.

Unfortunately, the news for Social Security is more dire. The amount paid in Social Security benefits is expected to be greater this year than what the program receives from payroll taxes for the first time since 1983. The recession has pushed payroll figures down, resulting in lower tax revenue. By 2037, the program's trust fund will be exhausted, and taxes will only cover around 75% of scheduled benefits.

The upshot of this news is that if you're counting on Social Security to support you, you may well be disappointed. The smart thing to do is to plan for what you'll do if you end up getting less from Social Security than you'd hoped.

Boost your income
Along those lines, there are several things you can do to generate income. One is to plan to use annuity products to replace monthly income that potential Social Security cuts may eliminate at some point in the future. Immediate annuities can provide a predictable stream of income for the rest of your life. Purchased from insurance companies, immediate annuities transform a fixed sum of money into monthly payments based on your life expectancy. With both private pensions and Social Security on shaky ground, annuities may prove the only dependable source of guaranteed monthly income.

In addition, you'll want to consider going beyond ultra-safe investments. Seniors and those near retirement often depend on risk-free investments such as Treasury bonds and insured bank CDs to provide income after they retire. But rates are too low on those assets to provide enough income for most retirees.

Like it or not, you need to seek out higher returns. Consider a combination of these strategies:

  • Dividend stocks. With rates on fixed-income investments in the basement, dividend-paying stocks have some of the best payouts around. For instance, the Fool highlighted Annaly Capital (NYSE: NLY  ) yesterday for its double-digit yield and success at turning the federal government's support of the mortgage-backed securities market into profits for shareholders. But even if you want blue-chip-quality companies, Altria Group (NYSE: MO  ) and Verizon (NYSE: VZ  ) combine 6%-plus yields with modest growth prospects going forward, and each has a strong track record of maintaining its payout even during tough times.
  • Growth stocks. Conservative investors are often told they need to get out of volatile stocks. But even for those in or near retirement, there's still a place for a modest helping of growth stocks in your portfolio. Netflix (Nasdaq: NFLX  ) , for instance, has proven surprisingly resilient during the recession, as budget-conscious consumers look for cheap entertainment options. Meanwhile, few have heard of Ebix (Nasdaq: EBIX  ) , the leading cloud-computing solution for the insurance industry, but it has been delivering record profits and huge growth.
  • Higher-yielding bonds. Corporate bonds are potentially riskier than Treasuries, but they offer greater rewards for those willing to take the time to ferret out good deals. You can buy company-specific bonds through most brokerage companies, or the ETFs SPDR Barclays Capital High-Yield Bond (NYSE: JNK  ) and iShares iBoxx $ Investment Grade Corporate Bond (NYSE: LQD  ) will give you broad exposure to speculative high-yield and higher-quality corporate bonds, respectively.

It's important to understand that these strategies can backfire. If another bear market hits stocks, then even the 0% to 1% yields that short-term Treasuries are paying right now would look attractive. Higher rates could send the value of corporate bonds spiraling downward.

But used prudently, these strategies can help you gain the traction you need to defend yourself against weakness in the Social Security system. The sooner you take steps to shore up your own assets, the less you need to be concerned about whether government checks will be as big as you're hoping when you need them.

Even retirees need great stocks. Let Jordan DiPietro point the way toward five dividend stocks that are making retirees rich.

Fool contributor Dan Caplinger has been planning on nothing from Social Security for decades. He doesn't own shares of the companies mentioned in this article. Netflix is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a bull call spread position on Ebix, which is a Motley Fool Rule Breakers recommendation. The Fool owns shares of Altria Group and Ebix. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy will never let you down.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 11, 2010, at 4:20 PM, 1caflash wrote:

    I am a U.S. Postal Service retiree since 2005. Autumn 2008, I met my Financial Advisor when He walked into my Gal's driveway. We talked and I moved my Portfolios to his company. I had to do it again because in early 2010, he found a better opportunity. He has helped me purchase Long-Term Healthcare Insurance for my Lady and me. I had a gambling habit trading stocks too much. He tells me "No" when I'm too eager. HE is a GREAT 31-Year-Old Person! He finds under-the radar dividend-paying bargains. I don't blame Him for anything! August 9, 2010 in my tax-deferred IRA, we bought 700 shares of C? NO! August 11 in the same account, we bought 500 shares of BAC? No! These 1200 shares were added to our investment in [Drum Roll, Please] ... ARCC- Ares Capital Corporation, which upped my September 2010 dividend by $420. This Company is Growing, with under 255 million shares. I never bought C and I had too many losses in BAC. Investing in these almost undiscovered "Gems" literally pays me Dividends and is BETTER THAN GOLD. ARES announced 35 cents per share early August. There is no "uncertainty" for this payment. Matt, Thank You for helping me do better when many folks are "running scared". Rest in Peace, Roy.

  • Report this Comment On August 11, 2010, at 4:24 PM, 1caflash wrote:

    Correction: DAN!

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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