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The Rules Of Retirement Have Changed

Let's face it; the rules of retirement have changed. What we were told to do 30, 20 even 10 years ago now seems like a pipe dream. "Be loyal to a company and you'll get a pension. Save a little money in a 401k and buy a house. When it's time to retire your investments and your home will have grown many times over, so you'll have plenty of money" we were told …"plus Social Security will always be there for you, too!" Perhaps we were sold a bill of goods or maybe it is the natural order of things, but one thing is for certain: the rules have definitely changed and it's time to take the risk out of retirement and take control of your finances…because you can't count on Social Security being there for you.

With pensions nothing more than a fading memory for most, 401k's that are now 201k's, Social Security turning to dust before our very eyes and the home we were going to sell into retirement for a big profit now a veritable pipedream, it is time for investors to take control of their financial future. A combination of unpredictable markets, the erosion of defined benefit plans, the uncertainty about Social Security, and longer life expectancies means a new paradigm is upon us in retirement planning challenging the long-held beliefs in financial planning.

In 1939, before America entered World War II, life expectancy was just over 59 for men and slightly above 63 for women. This means that when Social Security was implemented with an eligibility age of 65, the average American would not live long enough to access the benefit. Gee thanks, Uncle Sam! With life expectancies climbing fast and medical advances extending life longer every day, you had better plan to spend a whole lot of time in retirement, and you don't need me to tell you that you don't want to do it without any money!

Whether most people lack the resources or are simply unwilling to face the realities of what it will take to retire comfortably, most retirees are not ready for the leap. Every year, more and more Americans move toward retirement with insufficient savings, and with this the country is moving into dangerous territory. People are living longer these days, a lot longer. Now when I plan retirement income distributions for a couple I have to calculate the expectation that one of them will reach the age of 95. Considering that people over age 65 spend four times as much on healthcare, and that end-of-life care can eat up approximately 80% of your assets, every American had better recalculate their retirement planning strategy, regardless of whether you are already retired or planning to.

Will you have enough to retire?

The problem is that people fail to make a provision even remotely adequate for maintaining their pre-retirement lifestyle. Studies found that U.S. savings rates are somewhere between 25% and 38% of the amount required to meet overall retirement needs; that Social Security will make up 80% of retirement income for the least wealthy 20% of retirees; and that at current mortality rates, the average under-funded household faces over 20 years of unfunded living expenses, and rising fast. The answer is clear; it's time to build up that nest egg that we always thought would just appear on its own. Studies suggest that people age 50 and over immediately begin to set aside 13% to 23% of their current gross income.

Over the past 20 years, self-managed 401k's have increasingly replaced the "pension". Instead of counting on professionals to manage their asset pool (as was the case with a defined benefit plan), workers are expected to make their own long-term investment decisions. More importantly, workers are expected to do on their own what pension actuaries once did with sophisticated computer models; figuring out how the lump sum of their savings nest egg can be translated into an income stream at retirement, and manage it in the proper investment vehicle so that the income stream doesn't dry up or crumble over unpredictable cycles of market returns and today's crazy volatile markets.

Currently more than half of Americans who are just 15-20 years from retirement believe they are more likely to be hit by lightning than to receive their full due from the government (true statistic). Yet, the average American spends more time researching the purchase of a refrigerator throughout their lifetime, approximately 2 hours, than planning for retirement (also, true). So, why the disconnect?

Managing your own money is a daunting task. The overwhelming number of choices, accompanied with the fear of making a mistake is paralyzing, and often leads to the wrong portfolio, many times holding assets that were bought for the last bull market and not the next one. This is particularly true with retirees, as many investors still have a portfolio of "yesterday's" investments and not one for tomorrow.

Many investors were lulled into a sense of complacency with the good stock markets of the 80's and 90's. During that time making money became easy and many thought they were at least

as good as a professional. However those easy markets have changed. We know that economies rely on more spenders to grow. Through the study of demographics, we also know that people's spending generally peaks at age 48. Unfortunately, the 92 million Baby Boomers are now past their peak spending age and well into their savings phase. This coupled with the fact that the American consumer is massively over-indebted and over-leveraged, implies that the economy is in for a rough ride for several more years. These very issues along with solutions are easily explained in Facing Goliath: How to Triumph in the Dangerous Market Ahead, a must read for every investor.

With great challenge comes great opportunity. The 1930's are associated with the Great Depression, yet more millionaires were created in America in that decade than any other in American history. There are plenty of places to make money with less risk in this market, if you know where to look.

One of the mantras I talk about each week on my Smart Money radio show is "Invest for need, not for greed". That is the concept of simply getting the highest returns that your portfolio "needs" with the least risk possible. I have found over and over again that most people take on much too much risk; more than they need, more than they want and often more than they think they have. If you took a big hit in the recent bear market and you cannot replace this money, you are taking on too much risk, even if you clawed your way all the way back. Next time you may not be so lucky.

Be the expert… or hire one!

Personal finance and making a retirement plan is serious business. You need to get the fundamentals down pat, spend a lifetime updating yourself on the rules and laws, and learn the ins and outs of calculations for retirement in particular. For instance, did you know that each year a person postpones retirement reduces his or her need for retirement savings by about 5%, while increasing Social Security benefits by 7%?

Unfortunately, hardly any pre-retiree takes the trouble to figure out that he or she will almost certainly need to plan to live a good 20 to 30 years or more after retirement. In that time, the price level will almost certainly rise dramatically, even at present low levels of inflation. How do you deal with that when most of us can barely afford to have enough to retire on for the first few years after the gold watch?

In addition, there is the investment management to consider. You can't just read "The Wall Street Journal" for a few months and expect to get it. This is serious business and small mistakes today, whether with too aggressive, or too conservative a portfolio, can create enormous problems tomorrow. Whether you opt for a managed portfolio or go with a guaranteed principle and income program, opportunities are abound. Just make sure you have the right coach to lead you there.

For some reason, people always think they can take short cuts with their retirement planning. The biggest mistake one can make is to fail to educate themselves or hire the right coach to help them navigate these difficult waters. For some reason, people (especially men), hate to ask for directions. Although this may be a cliché about driving, and I don't know if it's true or not, but it most assuredly is with personal finance.

It's the distribution and succession, not just accumulation

For those who do prepare properly, careful consideration must be paid to not only saving and investing the money, but on the proper mechanics on how the assets need to be held in order to maximize your income distribution through your retirement. It does no good to spend your life saving and investing wisely only to give it all back to Uncle Sam! After all, it's what you and your loved ones keep, that counts.

First class, coach or the bus? It's up to you!

That voice you hear is not in your head nor is it the one you wish you heard when you were a little kid to warn not to do something stupid. It's real and it demands your attention. There are no do-overs at this point in your life.

You owe it to yourself and your family. Don't be that guy that runs out of money at 83 years old with plenty of life left because you never stopped to develop a plan, or the one that dies and wasn't organized enough to have a plan for his or her family. Whether you work with me or someone like me, just get it done.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.