You're on Your Own (And That's Okay)
By Justin Fox

(FORTUNE Magazine) – It has not been the sort of year that makes you breathe easy about retirement. United Airlines got permission from a judge to default on $6.6 billion in pension commitments. The government's Pension Benefit Guaranty Corp., which picks up some of the burden when companies like United fail, is in need of a taxpayer bailout itself. President Bush declared in his State of the Union address that Social Security was "headed toward bankruptcy." Ford announced that it was suspending matching contributions to the 401(k)s of its salaried employees. Even state and local government pension funds, those bastions of old-style retirement generosity, ran into money troubles and political headwinds. As for the stock market, that 1990s answer to all retirement quandaries, it spent the first half of 2005 going in its new favorite direction: nowhere.

A retirement nightmare, you might say, except that we're not going to wake up and forget it. The dream, it turns out, was what our parents (and their counterparts in many other wealthy countries) experienced in the half-century after World War II: Work hard for four-plus decades, then kick back to enjoy a well-funded retirement for which someone else did the planning. That's not the way it's going to work anymore. Mom and Dad got help; you're pretty much on your own. You can't count on a corporate pension or even Social Security to be there. You have to pilot your own ship, find your own safe harbor. If you manage it, the years after 65 can still be a time of dreams fulfilled, golf played, beaches combed--and increasingly, as "old" is redefined to mean over 80 or 85, mountains climbed, waves surfed, degrees earned, and new careers launched. But getting there will require saving, planning, thinking, taking risks, and possibly continuing to work past retirement age.

Which is where this retirement guide comes in. In it you will find, among other things, smart stock market advice; a seemingly audacious proposal for cashing in on the real estate boom; a portfolio of overseas retirement locales; a guide to do-it-yourself IRAs; an outline of the biggest risks to your retirement security; and a profile of Age Wave guru Ken Dychtwald, who believes baby-boomers are entering a new phase of "middlescence" that will render conventional notions about retirement obsolete.

Before we get to all that, though, it's worth explaining just why it is that old-style retirement won't work anymore. The reason you already know is that the members of the famously humongous baby-boom generation are about to hit pension age (the oldest boomers will be able to collect early- retirement Social Security checks starting in 2008), and they plan to stick around to enjoy their golden years. In 2000, 12.4% of Americans were 65 or older. By 2030, the Census Bureau projects, that figure will be 19.7%. The rate of oldsterification will slow after that, but longer life expectancies mean there's not much prospect of a reversal.

It's important to remind ourselves that this is mostly a good thing. We get to live longer, dammit! But our longevity will cost us, and our kids. Starting in 2018, Social Security expenditures are expected to surpass payroll-tax receipts. The forecast funding gap is not insurmountable: A combination of relatively modest benefit cuts and tax increases would keep the program afloat. It won't be enough, though, to give current workers what every previous generation has enjoyed: a Social Security payout that exceeded what they put in.

Things look even worse for the corporate pension, a traditional key to security for FORTUNE readers. Just 20 years ago 80% of workers at medium and large U.S. companies were covered by defined-benefit pension plans that promised retirees a monthly check. By 1997 the share had dropped to 50%. After that, the Bureau of Labor Statistics stopped counting things that way; the latest info is that just 21% of workers at all private companies are covered by defined-benefit plans.

The death of the corporate pension was to a large degree inevitable. The modern version evolved in the years after World War II, when American industry seemed invincible and the assumption was that companies would stick around longer than their retirees. In fact, corporations go bust. In 1974, after several high-profile bankruptcies, Congress passed the Employment Retirement Security Act, which brought pension-funding rules and created the Pension Benefit Guaranty Corp. ERISA forced CEOs to confront the true cost of their pension promises. The bosses didn't like what they saw. It's hard to find a company founded since the 1970s that even has a defined-benefit pension plan, and older corporations that do have been torn between the interests of retirees and the current needs of shareholders, lenders, managers, and employees. Retirees can't win such battles--except in heavily unionized industries like steel, auto, and airlines, where old-school corporations are being killed by competitors that don't have big pension obligations. That's United's sad story.

Here again, believe it or not, there's an upside: Corporate pensions left job hoppers, most small-business workers, and the self-employed in the cold. The new landscape of 401(k)s and IRAs offers, at least in theory, a tax-protected path toward an affluent retirement for all. That so many Americans fail to adequately avail themselves of these opportunities speaks to two big problems: A lot of us are feckless savers and investors, and the marketing-driven mutual fund industry often caters to our worst instincts. As a result, many big corporations are moving toward a more paternalistic approach to 401(k)s, in which employees are signed up unless they explicitly opt out, fund choices are limited, fees kept low, and advice offered.

But the very fact that you're reading this retirement guide already means you weren't banking on corporate paternalism. You also already knew Social Security would be at best a modest help, right? And while the risks are certainly on your mind, you're ready to grab the opportunities. You may have tons of home equity you can tap. The stock market should still keep you ahead of inflation. And as the boomers age, they may just succeed--as they have in every other stage of their lives--in making old age hot. No, retirement isn't what it used to be. It could turn out to be much more interesting. Read on.


Seniors, It's All Up to You

The baby-boomers--a generation accustomed to getting its way--will be by far the largest group ever to enjoy a prolonged post-working life. But as boomers have aged, the responsibility for supporting seniors has shifted from corporate and government pensions to the seniors themselves.

1946 The first baby-boomers are born.

1948 National Labor Relations Board rules that pensions can be part of contract negotiations.

1950 GM and Ford launch pension plans for union workers.

1950 Population over 65 -- 12.3 million

1951 First variable annuity created.

1958 AARP is founded by Dr. Ethel Percy Andrus, a retired high school principal.

1960 Population over 65 -- 16.5 million

1964 Automaker Studebaker goes under, leaving thousands of employees without the pension benefits they were promised.

1965 LBJ signs the Medicare/ Medicaid bill.

1970 Population over 65 -- 20.1 million

1975 Americans embrace the new IRA, contributing $1.4 billion in the first year.

1980 Benefits consultant Ted Benna uses a tax loophole to create the first 401(k) plan.

1980 Population over 65 -- 25.6 million

1983 Congress raises payroll taxes and future retirement age to strengthen Social Security.

1985 The Golden Girls brings retirement to prime time. Cocoon features frisky seniors.

1990 Population over 65 -- 31.2 million

1995   • FORTUNE publishes first annual retirement guide. • Enrollment in defined-contribution plans like 401(k)s surpasses that of defined-benefit pension plans for workers at medium and large companies.

1997 Congress creates the Roth IRA.

2000 Population over 65 -- 35.0 million

2001 First baby-boomers turn 55.

2004 Population over 65 -- 36.3 million

2005 • Bankrupt United Airlines is allowed to default on its pension commitments. Ford suspends 401(k) matching contributions for salaried workers. • President Bush pushes for partial privatization of Social Security.