5 Pillars of the New Financial Reality

By now, most people recognize that the world of personal financial has undergone some drastic changes. Money expert and author Matt Rettick says Americans need to recognize that things will never go back to the way they were before the financial crisis.

"The old fear used to be that you'd die right after you retired and you wouldn't have a chance to enjoy it," Rettick says. "The new fear is that you'll outlive your money."

The days of relying on a combination of a pension from your lifelong employer and a reasonable Social Security check to support you in your old age are over. In fact, Rettick says, we're fast approaching a time when the average person could spend more years in retirement than working.

His new book -- "All the Rules Have Changed: What You Must Do to Succeed in the New Financial Reality" -- delves into the new financial order. We recently talked to Rettick about the new financial strategies and how people need to adjust their plans in light of them.

5 Pillars of Financial Security and How to Replace Them

1. Pension plans are disappearing. "At their peak in 1983, there were 175,000 pension plans," says Rettick. "Today there are less than 25,000 pension plans and many of those are frozen so that new employees cannot join them. People are living 30 years on their pensions instead of two or three years, and stock market returns haven't been high enough, so many of these plans are insolvent."

The solution: Rettick says you should create your own pension plan by setting up annuities for your retirement.

%VIRTUAL-article-sponsoredlinks%2. Social Security is unstable. "Since 2010 we've been paying out more money in Social Security benefits than we're taking in through payroll taxes," says Rettick. "Social Security will only become solvent if we decrease benefits or increase taxes. More than likely, they'll increase the age limits in the future."

The solution: If you're under 40, you should act as if Social Security won't be there at all when you retire; if it is, then you'll have some bonus income in retirement. If you're older than 40, Rettick recommends working with a Social Security expert to help you decide when it's the right time to trigger your benefits. "If you take them at 62, you'll get 25 percent less than if you wait until you're 66, and if you wait until you're 70 you'll get 25 percent more than you will if you start at 66."

3. The stock market is volatile and unpredictable. "Twenty or 30 years ago, it was a big deal if the stock market moved 20 or 30 points in a day, but now we can see it move 400 points in a day," Rettick says. "The old rule used to be buy and hold because if you hang in there the market will come back. But depending on your age and whether you're in retirement, the impact of that strategy could be devastating."

The solution: Be well diversified, says Rettick, and follow the "investment rule of 100." The rule of 100 says that you take the age to which you could potentially live (100) and subtract the age you are now. The percentage of your assets matching the age you are now should be invested in safe, no-risk, guaranteed accounts; the remainder should be invested in stocks. So, for example, if you're 60, then 60 percent of your investments should be no-risk and up to 40 percent should be in stocks. "Reducing losses is extremely important once you're over age 50," says Rettick.

4. Home equity is unreliable. "The three legs of your financial plan used to be a retirement plan such as a pension or a 401(k), Social Security, and personal savings," says Rettick. "For most people, their home represented a huge percent of their assets. We all saw what happened to those assets during the housing crisis, and even though housing values are going up again, 10 percent of homeowners are still underwater on their mortgages."

The solution: Rettick recommends paying off your mortgage as soon as possible so that you own a safe and secure asset and are not in danger of losing your home. He also suggests that you don't rely on your home for cash flow the way some people did before the housing bubble burst. "Depend more on your savings and investments than on your home," he says.

5. People are living longer. "The majority of people feel they aren't ready for retirement and expect to be worse off in retirement," says Rettick. "The reality is that you need to be prepared to live for 20 or 30 years in retirement."

The solution: Rettick recommends getting appropriate investment advice to avoid the erosion of your savings due to inflation, to avoid losses, and to prepare for long-term care costs.

Common sense still applies

"People can handle the new reality if they save more and spend less," Rettick says. "Everyone needs to eliminate debt as soon as possible and put the burden of the future in their own hands, ideally saving 10 to 15 percent of their income for retirement."

Michele Lerner is a Motley Fool contributing writer.