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Prepare for a Different Kind of Retirement

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Everything changes over time -- especially retirement. Yours will likely differ significantly from that of your parents. Know what to expect, plan accordingly, and your golden years will be much lovelier.

First and foremost, you probably won't have a pension. In 1985, about 89% of Fortune 100 employers offered a traditional "defined-benefit" plan, or pension. In 2011, only 17% do so for new hires. In that period, "defined-contribution" plans such as 401(k)s rose in prominence, with the percentage of employers offering them soaring from 10% to 58%. This is a big deal, because defined-benefit plans told you what to expect and typically offered substantial sums. With 401(k)s, many employees either don't take advantage of them, or do so insufficiently. Leaving a job after 30 years with, say, $100,000 in your 401(k) isn't going to support a comfy retirement.

No slacking off
While receiving a pension takes little effort, those who depend on income from 401(k)s and IRAs and other accounts will have to keep managing them well into retirement. You'll likely have significant taxes to pay, too, since withdrawals from traditional IRAs and 401(k)s will be taxed at your ordinary income tax rate. (Compare that with the current 15% maximum tax rate for most folks on capital gains and dividends.)

In the past, retirement meant no more working. Today, though, many retirees maintain part-time jobs. Many have to do so, since their retirement nest egg is insufficient to support them, and Social Security doesn't provide as much as they hoped it would. (Working can sometimes also provide valuable benefits such as health insurance.) Others work because they want to, finding that they're too bored or restless at home. As medical advances help people live longer, your retirement will also likely last much longer than those of previous generations.

Prepare, and be creative
Besides working longer, you have plenty of ways to make lemonade from life's retirement lemons. Socking away more money is a good start. So is investing it more effectively. CDs and money market funds may seem "safe," but they also won't grow your nest egg much.

You can also work a few more years than you planned to, before retiring. That not only lets you earn and save more money, but also postpones your need to tap that nest egg.

In addition, be sure to think outside the box. Many people have enhanced their retirements by moving to a smaller and less expensive home, or to a less expensive part of the country. Reverse mortgages, which offer you a regular income based on your home equity, are also worth considering. They have their drawbacks, but they're also a good choice for some.

Optimize your portfolio
Thinking ahead isn't your only good move when planning for a better retirement. Take time now to assess your portfolio, ensuring that you're invested in strong and productive investments. For retirees and pre-retirees alike, dividend-paying stocks are a compelling option. They offer a regular and fairly dependable income that can grow over time, matching or even surpassing inflation. In 2010, far more companies raised their dividends than in 2009, with further strong growth expected this year.

The following companies have increased their dividends significantly over the past year, signaling confidence in their future performance:

Company

Recent Dividend Yield

Last Dividend Increase

Philip Morris International (NYSE: PM  ) 4.3% 10.3%
Pfizer (NYSE: PFE  ) 4.1% 11.1%
Intel (Nasdaq: INTC  ) 3.3% 14.6%
General Electric 2.7% 16.7%
CVS Caremark (NYSE: CVS  ) 1.5% 42%
Qualcomm (Nasdaq: QCOM  ) 1.4% 11.8%
Stryker (NYSE: SYK  ) 1.2% 20%
Visa (NYSE: V  ) 0.8% 20%

Data: Yahoo! Finance.

The golden age of pensions is over, and American retirements have changed dramatically. If you leave your retirement up to chance by merely saving money and hoping for the best, you'll likely face an ugly surprise. Take a little time to plan -- even without a generous pension, you may be able to make a great retirement a sure thing.

To get more ideas of great dividend-paying stocks, click here to read about "13 High-Yielding Stocks to Buy Today."

Longtime Fool contributor Selena Maranjian owns shares of Qualcomm. Intel, Pfizer, and Stryker are Motley Fool Inside Value picks. Philip Morris International is a Motley Fool Global Gains recommendation. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Philip Morris International and QUALCOMM. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.


Read/Post Comments (1) | Recommend This Article (5)

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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 February 11, 2011, at 8:01 AM, retiredpharma wrote:

    Selena,

    Good overall article re; Retirement, and factually all correct, having retired in 2007 I am living through many of your points of consideration.

    I would add that upon retirement, when taxable Income drops lower especially for those whom expenses go way down(albeit Medical goes way up!) as in my case, one could consider rolling over set sums of Regular IRA monies into Roth IRA. I receive a small pension and have Investment Income from divi paying stocks mainly.

    This will be a tax issue one way or another(pay Uncle Sam now or later?), and one must project their Income in each year when they roll over IRA money, but if you have much lower taxable income, it may be worth consideration to pay the taxes NOW and not in the future when you withdraw the funds!

    My Income dropped way down in Retirement by about 5 fold, so for me it made sense to roll over some regular IRA to roth IRA and that chunk becomes Income in that Calendar Year so do the math and figure out your taxable ceiling limits!

    retired pharma

    ps//of your pics I own PFE!

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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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