Tuesday, November 27, 2012

Surviving and Thriving in the New American Retirement System

For decades, there was a social contract in America between workers and businesses. In exchange for a lifetime of service, companies provided their long-term associates with pension plans and health care benefits, creating a safety net that when combined with social security helped ensure a comfortable retirement. Today, however, the middle class face nothing short of a crisis – social security is failing, the traditional pension has gone by the wayside, and the rising cost of health care have made it almost impossible for most businesses to afford decent coverage while withstanding calls from investors to maintain their profitability.

Combined with the recent trend toward outsourcing traditional blue collar jobs that afforded a white collar lifestyle, what is the average American to do? Here are some tips for surviving – and thriving – in the new retirement reality.

1. Always, Always, Always Take Your 401k Match

Most companies offer their employees some sort of matching on contributions made to their 401k accounts. Not only are the contributions tax-deductible, leaving more assets on your balance sheet rather than going to Uncle Sam, but the matching contributions make the probability of you compounding your wealth at attractive rates of return go up substantially. Imagine someone in the service industry that earns an annual salary of $40,000 whose employer offers dollar-for-dollar match on the first three percent of contributions. On their first $1,200 in deposits, the employee is going to get an additional $1,200 in matching funds – that’s a 100% return immediately!

2. Make Good Health Insurance a Priority

One of the biggest reasons for bankruptcy or financial ruin is a catastrophic health disaster that you or your loved one did not expect. Even if your retirement funds are full, your house paid off, your balance sheet clean, and your income secure, a heart attack, stroke, cancer, or severe accident without the protection of health insurance can cause bills in the hundreds of thousands of dollars to show up on your doorstep, wiping out decades of intelligent and disciplined wealth accumulation. Even if you can only afford a policy with a high deductible in the $5,000+ range, the goal should be to provide protection to help preserve what you’ve already built.

3. Control Your Debt to Equity Ratio

You hear it often but millions of people just don’t follow the simple rule: If you don’t have the money, don’t buy it. Despite good jobs, college educations, marketable skills, and comfortable lifestyles, many Americans are still only a few paychecks away from bankruptcy. Imagine how much excess cash you would have if you didn’t owe anything – no house payment, no car payment, no student loans, no credit card debt … nothing. In retirement, when your income is reduced, you can more easily maintain your standard of living.

4. Maintain an Asset Allocation Reflecting Your Lifecycle

If you are sixty five and no longer working, it makes no sense for you to have all of your capital invested in stocks. Likewise, if you are a new college graduate in your twenties, it is financial lunacy to keep your entire net worth invested infixed income assets. Constructing a well diversified portfolio with the appropriate asset allocation mix is vital to achieving your long-term goals.

5. Consider a Second Career

Retirement isn’t what it used to be. Now, there are a myriad of ways to generate extra income during retirement. If you are looking for social interaction, consider becoming a barista at Starbucks or a customer greeter at Wal-Mart! Not only could you be covered by some health benefits (in the case of the specialty coffee chain), but you will get a paycheck that can be used to help pay bills or serve as extra spending money. Maybe you could consider opening a store on eBay or starting a Blog that generates cash from Google AdSense. Generating as little as $10,000 extra income a year once you’ve entered retirement can make a huge difference in your day to day life.

A Final Word

If you need additional help, read 10 Steps to Building a Complete Portfolio to start the process of getting your investing life on track. In the end, remember that the new reality is that the American worker is going to have to finance an ever-increasing portion of his or her portfolio. By being prepared, and taking a few anticipatory steps, you can ease the transition, turning your golden years into everything you dreamed.