Your retirement is closer than you think. It doesn't matter if you're 22 years old and straight out of college or 65 years young and a prospective retiree, just days away from handing off your duties to your successor and spending the rest of your life ice fishing in the North Pacific Ocean. The rules of the game have changed. The days of a gold watch, lifetime pension, and company-provided retiree health care are rapidly ending, and they're not likely to return any time soon.
Companies such as Lucent Technologies (NYSE:LU) have dramatically scaled back retiree benefits, not just for new retirees but for current ones as well. Others, like bankrupt United Airlines, have essentially given up, turning their pensions over to the government's Pension Benefit Guarantee Corporation, which will pay out only pennies on the promised dollar. Recently joining United in bankruptcy, fellow major carriers Delta (NYSE:DAL) and Northwest may soon do the same with their pensions.
And it's not as though the worst is over. If struggling automobile titans Ford (NYSE:F) and General Motors (NYSE:GM) don't stop hemorrhaging cash and are unable to their businesses around quickly, they, too, will likely join the airlines and declare bankruptcy, turn their existing pension obligations over to the government as well, and drastically cut benefits going forward.
Even profitable companies like IBM (NYSE:IBM) have changed their pension plans in an attempt to reduce legacy costs out of fear of ending up like the airlines, automobile manufacturers, and telecommunications giants. The message is coming in loud and clear -- no matter how old you are, no matter what company you work for, if you want to retire while you're still young enough to enjoy your life, you need to start paying attention to your future now.
Take action to protect your future
If you're close to retiring, you need to shore up your nest egg, to protect against a similar fate. Even if you're still expecting to work for three or four decades, you're not off the hook. Along with the reduction in traditional corporate pensions comes the news that Social Security will require either major tax hikes or benefit cuts in the next 40 or so years. If you're just starting out, this long-run funding shortage lessens the likelihood that Social Security in its present form will be able to provide a major part of your sustenance in your golden years.
Social Security and corporate pensions, two-thirds of the traditional three-legged retirement funding stool, are showing significant signs of wear and tear. That leaves the third leg -- your personal savings and investments -- to pick up a far larger share than you may otherwise have hoped. No matter who you are, no matter what you do, if you want a solid, prosperous retirement, you need to take matters into your own hands. You need a plan for your future.
The ticking clock
The absolute best time to start planning for your retirement is the day you draw your very first paycheck. Failing that, the next best time is today. The more time you have, the easier financially it is to have a shot at reaching your goals, whatever they may be. Assume you have a goal of amassing $1,000,000 for your retirement. The chart below shows how much you need to save every month from now until retirement to hit that target.
| Years to Retirement | Potential Annual Return (%) | Monthly Contribution Needed | Total Out-of-Pocket Contributions |
|---|---|---|---|
| 5 | 5% | $14,704.57 | $882,274.02 |
| 10 | 6% | $6,102.05 | $732,246.02 |
| 15 | 7% | $3,154.95 | $567,890.89 |
| 20 | 8% | $1,697.73 | $407,456.17 |
| 30 | 9% | $546.23 | $196,641.42 |
| 40 | 10% | $158.13 | $75,900.37 |
As you can see, time becomes your enemy the longer you wait. The more time you have, the lower each contribution and your total out-of-pocket investment will end up being for you to be able to reach your goal. Also, the more time you have before you need to spend your money, the more aggressive you can be with your investing, and the higher your potential return target can be.
If you absolutely need to spend a dollar tomorrow, the high volatility of the stock market isn't the place for that buck. On the flip side, if you have a few decades to make up for a crash, you can likely afford to put more of your money into broad stock market trackers like FidelitySpartan Total Market (FUND:FSTMX) and reap the benefits of the stock market's compounding over long periods of time.
Build your personal plan
You know your retirement is important to you. What you may not be aware of, though, is that you are the absolute best person to get you from where you are now to where you want to be. Only you know your hopes, your dreams, and your desires. Only you are truly aware of what types of risk you're willing to accept on your path to get there. And most importantly, only you can make the choice to place your retirement as high on your priority list as it needs to be, if you want to retire comfortably.
My friend and colleague Robert Brokamp runs Motley Fool Rule Your Retirement. While his newsletter can show you the tools, techniques, strategies, and programs available to help you retire to the life you want to lead, it's still up to you to implement your plan and make it happen. Click here to start your 30-day free trial and begin your journey closer to the retirement you've always hoped to have.
At the time of publication, Fool contributor Chuck Saletta owned shares of Lucent and General Motors. The Motley Fool has a disclosure policy.
