You only get one shot to retire right. If you prepare for it well, you have a decent chance of spending the rest of your life in comfort. If not, there's a very high likelihood that your golden years won't be anything like what you had hoped they would. In this era where pensions are being frozen, even by profitable companies like IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ) and Verizon (NYSE:VZ), your retirement is more your responsibility now than ever before.
Don't count on the government's safety net to provide much support, either. Social Security, at its best, will provide a supplement to keep you out of abject poverty. At its worst, it won't even pay the rent in a modest apartment in a not-so-ideal part of town. Although Medicare provides decent coverage for what it pays, according to this pamphlet, there are serious holes in what it offers. For a service geared towards the elderly, it's missing a few items that tend to be important for people in that age bracket, such as:
- Most dental care and dentures
- Most routine doctor visits
- Most routine eye exams or eyeglasses
- Hearing aids
- Long-term care
- Custodial care
It gets ugly
Of course, should your health deteriorate, there's still the government program of last resort, Medicaid. To its credit, Medicaid does pick up many of the gaps in Medicare, in most cases. To qualify, however, you pretty much have to exhaust your assets, aside from a small amount available to provide basic living conditions for your spouse or minor children. Even then, Medicaid provides bare-minimum services and is not really focused on providing you with a high-quality experience.
If you don't want to spend your final days destitute, it's a pretty bad idea to rely solely on the safety net of either your employer's soon-to-be-frozen pension or the government's generosity. I've seen too many people close to me -- who've relied on these broken promises -- find out that they'd slipped through the cracks only after it was too late to do anything about it. It's a terrible predicament to face, both for the person who needs help and for the family forced to make a series of extremely difficult decisions.
Plan early, retire well
The good news, though, is that not all hope has been lost. While the traditional safety nets may be showing signs of wear and tear, there are tools available to help you truly enjoy your golden years. Unlike automatic pensions, however, these tools require you to make some active choices and to plan ahead -- well ahead -- of your need for the money.
You've probably heard of some of them. The retirement plans go by names like "IRA," "401(k)," "403(b)," and "Thrift Savings Plan." The key feature that each of these programs share is that they all benefit from tax-deferred compounding. In other words, you put money into the plan, and while it's in there, you don't owe any taxes on the interest, dividends, or capital gains associated with the stocks or funds you hold in the account. With enough time to let that tax-deferred compounding work for you, those plans are tremendous vehicles for socking aside enough money to make up for your lost pension.
The catches
Of course, there still are no free lunches. For you to take advantage of these plans, you typically need to:
- Decide to participate
- Actively contribute your own hard-earned cash
- Choose what investments to own within the plan
Plus, there's the very real fact that everything in investing is a trade-off. You can choose an aggressive route and potentially retire sooner if things go your way. If that's the case, overweighting choices like Fidelity's Spartan 500 Index (FSMKX) whose top holdings include JPMorgan Chase (NYSE:JPM), General Electric (NYSE:GE), and Pfizer (NYSE:PFE), might suit your plans. Alternatively, if your targeted retirement date is quickly approaching, a conservative investing approach is in order. In that case, placing more of your contributions in less volatile offerings like the iShares Lehman TIPS Bond Fund (NYSE:TIP) or Schwab's YieldPlus Select (SWYSX) may make sense.
With so many choices to make, and so many pros and cons to weigh in retirement planning these days, it's easy to get lost in the details. But if you want to be successful, you must persevere. Unfortunately, with such frayed safety nets in place, if you fail to plan for your retirement, then you're really planning to fail.
Your roadmap
That's where my Foolish colleague Robert Brokamp can help. He has assembled a world-class collection of resources and a team of retirement experts for his Motley Fool Rule Your Retirement service. His primary goal is to help you get the information you need to make the right decisions for your future. In fact, he believes so strongly that everyone should have a chance to get from where they are financially to where they want to be that he'll let you have 30 days of his service for free. Simply click here to begin your trial.
Your retirement is too important to leave to chance or to worry about later. Get started now to assure that your golden years truly are golden.
At the time of publication, Fool contributor Chuck Saletta owned shares of General Electric. Pfizer is an Inside Value selection. JPMorgan Chase is an Income Investor recommendation. The Fool has adisclosure policy.
