While it certainly comes as no surprise that the Social Security trust fund is bleeding, a recent report now predicts the fund will show up in the morgue sooner than originally thought. This cold, hard fact that Social Security won't be there for us further emphasizes the importance of our own retirement planning. So what actions can we take to make sure we'll be prepared and self-reliant?
Money really does grow on trees
The best place to invest for retirement is in an employer-sponsored retirement plan, typically a 401(k). Not only do your personal contributions reduce your tax liability dollar-for-dollar today, your money grows tax-deferred. And even more enticing, many employers fork over free money.
Chances are very good that if you're offered a 401(k) or a similar retirement plan through your employer, they bestow you with a 401(k) match. It'd be small-f foolish not to contribute at least the bare minimum to pocket your employer's free money. Employers also often reward employees with annual profit sharing distributions, which are deposited in our 401(k)s and allocated into the investment selections we've chosen.
If you've contributed at least enough to take advantage of your 401(k) match and if you meet certain income requirements to qualify, then strongly consider opening and funding a Roth IRA -- a tax-free retirement account.
Consider more aggressive, growth-oriented investments for funding your Roth IRA since they afford you the best tax-free bang for your investment buck. This is especially true for young investors who have more time for the tax-free growth to compound.
If you are closer to retirement, or favor more conservative investments, dividend-paying stocks provide excellent opportunities since their normally taxed dividends grow tax-free in a Roth IRA. In particular, I like Intel
Roth IRA on steroids
For investors who may be excluded from participating in a Roth IRA due to the income requirements, a life insurance retirement plan, or LIRP, may be for you. LIRPs are little-known retirement planning vehicles that are designed to merge the benefits of tax-advantaged life insurance and retirement savings.
Think of a LIRP as a Roth IRA on steroids. It's intended to provide you with tax-free retirement income via a life insurance policy featuring potential market appreciation and a life insurance death benefit for those who depend on you. Insurance companies sell the policies that get used in LIRPs. Of course, like all investments, LIRPs aren't one-size-fits-all. They only work if you're insurable and can diligently and systematically make contributions for about a decade before taking any distributions.
Take the reins
Regardless of when or how our lawmakers ultimately address our entitlement program mess, the best retirement strategy is the one you proactively craft for yourself. Make it a point to become knowledgeable about your investment options, and develop a plan for creating your own financial peace of mind.
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