It's time to face the facts: The era of lifetime employment, capped off with a gold watch and a guaranteed pension, is over. It's routine for financial basketcases like US Airways (NYSE:LCC) to stop their pensions as part of their bankruptcy proceedings. The trend these days, though, is for companies that haven't gone bankrupt -- Alcatel Lucent (NYSE:ALU) and Ford (NYSE:F) come to mind -- to cut back on previously expected retiree benefits.
Instead of promising a guaranteed payout, most companies are now providing a certain level of funding, with employees responsible for figuring out how to make their share of that money last. If you're like most folks, even if your employer has cut its pension and other benefits, you still want to retire someday. Yet that day may feel as though it just keeps getting pushed farther away, especially if you're among those of us who can no longer count on a full pension. Now more than ever, it's up to you to ensure your retirement is well-funded and satisfying.
Find your free money
To encourage you to start planning now, I'm going to tell you about a perfectly legal strategy that can instantly double your money. Heck, Uncle Sam and your boss will probably even help you do it.
There is a catch, though: You have to start the ball rolling. You have to take the initiative and say to yourself, "Self, today is the day I fill out my 401(k) paperwork." Yeah, it's that thing again, that ugly conglomeration of numbers, letters, and parentheses. As odd as the name may be, your 401(k) just might be the ticket to instantly doubling your money.
The fine print
Buried in the fine print of your employer's 401(k) plan, there might be a note saying that the company will match your contributions, perhaps at $0.50 for every $1 you contribute. Some companies, such as Sears Holdings (NASDAQ:SHLD) and Novartis (NYSE:NVS), will even match part of their employees' contributions dollar for dollar, making the effect that much greater. Your company's match is largely free money -- yours to keep once you're vested -- and it goes straight into your account. That matching contribution goes a long way toward making the magic happen. The rest is provided by the U.S. government.
If you've got earned income, chances are you're getting taxed on it. For the sake of argument, let's assume you're in the 25% federal tax bracket. That means that the last dollars in your paycheck shrink by about 25% before you see them. If you contribute to your employer's traditional 401(k) plan, however, those income taxes are not taken out of the money you invest. Instead, income taxes are deferred until you withdraw the money.
Add up the tax deferral and your employer's generous match, and the results look something like this: You invest $1,000 into your 401(k). Your employer adds $500, for a total of $1,500 invested. Thanks to Uncle Sam declining to immediately tax your money, your take-home pay will have dropped by only about $750 for that $1,000 contribution. Net result: Your 401(k) balance is instantly $1,500, and it cost you only $750 of spendable money. Congratulations -- you've instantly doubled your money!
Then what?
Truth be told, getting the money into your account and watching it instantly double is the easy part. After all, to get that far, you merely need to fill out some paperwork. But how should you invest all that money you're setting aside for your future? That's where my friend and colleague Robert Brokamp can lend a hand. As the lead analyst for Motley Fool Rule Your Retirement, Robert can help you determine what type of investments make the most sense for you.
You may be OK with an aggressive stance, putting a lot of your money in stock market vehicles such as the Diamonds (AMEX:DIA) trust that tracks the Dow Jones Industrial Average. On the other hand, you may be of the "once bitten, twice shy" persuasion, having lost a ton of your money when the dot com bubble collapsed in 2000. In that case, you may feel comfortable only if a large chunk of your cash is safely tucked in the type of low-volatility investments favored by the JPMorgan Short-Term Bond (FUND:JMSBX) fund.
In truth, you'll never know what kinds of investments are appropriate for you until you start thinking about the right questions. Rule Your Retirement has an excellent financial-planning tool that asks the right questions and starts you down the path to financial security. It's available here (for subscribers only -- if you're not yet on board, click here to get started), and it's yours to use as part of your membership.
Get started today
As pensions increasingly crumble, it's up to you to make sure your retirement nest is well-feathered. The sooner you start, the quicker you can get your money to instantly double. And once you've invested your cash, your boss' cash, and Uncle Sam's cash on your behalf, a solid investment plan will provide you with a better retirement.
Still not convinced that you can figure out how to retire without a pension? Start a 30-day free trial to Rule Your Retirement, no strings attached, to see for yourself.
This article was originally published Feb. 17, 2006. It has been updated.
At the time of publication, Fool contributor Chuck Saletta owned shares of Alcatel Lucent. The Fool has a disclosure policy .
