Retirement income comes from three places -- Uncle Sam, pension plans, and one's own hard-earned savings. But let's face it: Social Security payments aren't enough to comfortably live on, and the days of pension plans are rapidly dwindling. These cold, hard facts further emphasize 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, but your money also grows tax-deferred. Even more enticing, many employers fork over free money.
Chances are good that if you're offered a 401(k) or a similar retirement plan through your employer, they grant you a 401(k) match. 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.
Find out more by asking your human resources folks at work. They can get you a copy of your employer's Summary Plan Description, a document that explains the ins and outs of your employer's plan and your benefits.
Souped-up savings
If you've contributed 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 tax-free growth to compound.
Apple (Nasdaq: AAPL) and eBay (Nasdaq: EBAY) are great growth stocks to consider for your Roth IRA. Apple continues to post margin improvements and enjoys ample cash flow. The company has a ton of cash and still appears to be a good value, considering its five-year expected PEG ratio of 0.63. eBay boasts year-over-year quarterly earnings growth of 144%, thanks in large part to the success of its simple and trusted PayPal service. Both companies have solid management in place, little to no balance-sheet debt, and fantastic sales and earnings growth.
If you're closer to retirement or favor more conservative investments, dividend-paying stocks such as Procter & Gamble (NYSE: PG) and BlackRock (NYSE: BLK) provide excellent opportunities, since their normally taxed dividends grow tax-free in a Roth IRA. Consumer-goods heavyweight Procter & Gamble pays a 3.4% dividend yield, which it increased roughly 11% each year over the past five years. Financial-services powerhouse BlackRock pays a 3.5% yield, which it increased 26% annually on average during the same five-year period.
Roth IRA on steroids
For investors who may be excluded from participating in a Roth IRA because of 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 through a life insurance policy featuring potential market appreciation and a life insurance death benefit for those who depend on you. Insurance companies, such as Hartford Financial Services (NYSE: HIG), issue LIRPs. Of course, like all investments, LIRPs aren't one-size-fits-all. They work only 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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