Unlike the 2008 banking meltdown, the retirement meltdown is not going to occur through bad intentions. On the contrary – it’s a direct result of two things: changes in the employment marketplace and medical progress. The latter means that we’re living longer, most of us further and further beyond retirement age, and there are less people to fill the coffers. Coz at the end of the day, retirement funds are a sort of pyramid scheme. Great conditions for those who came in early enough, progressively worse the younger you get.

It’s ironic when you think how young this industry actually is. A bit over 200 years ago, the average age expectancy was 26 to 40 years, depending on where you came from. Then, there WAS no retirement. Even today, these are considered your most productive working years. The first example of caring for the aged comes in 12th century Ireland, where this was a stipulation. Families must care for their elderly!

Towards the end of the 19th century, Otto Von Bismark came up with the idea of pension plans for the disabled and anyone over 65. The American Express company was the first private company to create a pension plan for its workers in 1875, and in 1911, the National Insurance Act was introduced in England.

It’s an interesting fact that in the crash of 1929, less than 3% of pension funds went under. Things soon changed, and in 1963, Studebaker’s fund was the first to default when the company went bankrupt. Things have gone from bad to worse, as I said, also because of the increasing number of retirees-per employees. If in the 1950s it was 7 workers to each retiree, today’s ratio is half of that and it could drop to 1.2 to 1 by 2050. A related problem is that, to fill their coffers, more and more pension funds have been investing in riskier assets to cover the shortfall. This is precisely the opposite of what you should be doing with your nest-egg.

Now let’s cross to the other side of the fence – the workplace. More and more of us are now working as freelancers and more and more in micro-jobs, where a specific specialty is required for a specific short term of time. The result – no long-term employers to share the burden of putting money aside for our pensions. And. Even though it’s stipulated by law, most of us don’t have anything beyond the most rudimentary of plans. In the US, pension plans have declined by 75%i in the past 3 decades. Today, only 13% of private sector employees have one – that’s down from 38% in 1978. And we’re not talking about huge income plans – they’re often something that won’t provide much more than the bare minimum required just to eat on a daily basis. How do we deal with that? We try not to think about it.

But we should. In fact, now more than ever. And just like every other aspect of our financial well-being, it’s time we figured it all out for ourselves. Now, the number of “how to” guides is positively staggering, but most of them talk about how to SPEND your retirement funds wisely. Almost NONE of them talk about how to create it in the first place. They talk about downgrading your lifestyle, postponing retirement to 70 and so forth. But how GET there is so much more important.

So how can we create our own pension fund? Well, essentially, there’s not much difference between a retirement fund and any other kind of fund. Merely its makeup and strategy. The idea is a long-term investment that will pay enough to survive upon as of a certain date, tapering off as our life expectancy dwindles.

First, figure out how much you will need. Subtract from that other sources like national insurance and other plans you may have. Next, start saving. Your portfolio should be based primarily on long-term assets like government bonds, index ETFs and so forth. Shares only of well-established companies. In general, the lower the yield, the lower the risk; the higher the yield or interest or coupon, the higher the risk that something’s going to go south. However, and here is a big however: you CAN invest in higher risk assets like forex and other leveraged instruments, commodities, shares in up-and-comings, even bonds from developing nations, which usually offer a higher coupon. But you should only devote a third of your portfolio to these, and even THAT should taper off gradually the closer you get to retirement age. In general, a conservative portfolio will have 20% shares, 50% bonds and 30% cash. A more adventurous one will be 50% shares, 40% bonds and 10% cash. But you should carefully research these for yourself. You might even find that one of the newer retirement ETFs are a good bet for you.

Now, to create a balanced fund, you need to take into account how many years you have till retirement, you need an overall plan that includes both savings and withdrawal. Figure out when you begin to save, when you begin to withdraw and take a very optimistic estimate when you might die. Optimistic, because you’d rather be left with money over if you die early and not be penniless if you die late.

Second, remember, that the closer you get to the end, the more you can begin biting out of your fund’s actual principal. That might bite into your PROFITS on equity, but eventually you won’t need either one.

Here’s what it should look like if, 1: you expect to be working from age 20 to 70. 2: you can afford to put aside 26% of your income each month. 3: you can get an average 8% interest rate on your savings. And 4: you believe you can live on 60% of your last salary. The yellow is our equity, you can see how that increases till retirement age and decreases after. As with a regular trading account, that equity is made up of principal – in blue – and interest in orange. Now remember: interest is not on principal – what we’re paying in – but on equity, so it increases on both our monthly investments AND the accumulating interest. Also, take into account that this graph doesn’t take into account increases in salary. You can expect that to rise with age and experience, so that the uptrend won’t necessarily be straight, but more exponential. Finally, there’s the gray bars that we see as our principal flattens after retirement age. Those are our withdrawals, and they’re fixed. The fact they appear under the zero line doesn’t mean we withdraw increasingly larger sums. Instead, we’ve drawn them so they maintain a fixed distance from our equity, drawing that yellow line down towards the zero line by age 100.

As you can see, the strategy is quite simple. It just takes a bit of homework and a lot of responsibility. The sooner you start, the less you have to pay in on a monthly basis. And you can start with a riskier portfolio, so long as you taper off into extreme caution the closer you get to retirement age.