I came across Kimberly Palmer’s article titled “The Future of Social Security: Not Good“. My first response was ‘No duh!’  After giving it more thought, I came to the conclusion that my reaction is probably in the minority.

I suspect most people believe that the U.S. government will not let Social Security fail. This is the same government that deemed certain large companies ‘too big to fail’ and dragged other unwilling participants into the fray.  BB&T’s (BBT) Chairman and CEO, Kelly King has been very outspoken on how the government has managed the TARP debacle. And now the government is ‘helping’ the auto industry. Watch out Detroit!

The U.S. government has become too big and too ‘helpful’ to the detriment of its citizens. The government should spend more time providing for the common defense and less time promoting the general Welfare (pun intended).

So, what are your retirement plans? Are you going to rely on the government to print your social security check and the money backing it up, or will you choose to take charge of your future and prepare for it? As it is with most things in life, those that prepare for retirement will find more success than those that don’t.  It is really not that hard when you start young.  Here are three simple steps:

1. Live on less than you earn. (another ‘No duh!’ statement)
2. Invest the rest using a sound asset allocation model.
3. Pick solid, conservative, low-cost investments.

Number 3. on first blush may seem complicated, but it doesn’t have to be. For those that don’t want to make investing their hobby, they can focus on a few good funds like Vanguard’s S&P Index Fund (VFINX) and Vanguard’s Long-Term Bond ETF (BLV).

For those a little more adventurous, a strategy based on an article by Richard Jenkins titled “A simple ETF strategy for beginning investors“ has been quite effective over time. Don’t let the “beginning investors” term scare you away. The goal of this portfolio is to provide diversification over a broad allocation of stocks and bonds by holding five ETFs:  iShares Lehman Aggregate Bond Fund (AGG), iShares MSCI EAFE FD (EFA), Vanguard Total Stock Market ETF (VTI),  iShares DJ Real Estate Index (IYR) and iShares DJ Basic Materials (IYM).

For those comfortable in selecting and holding individual stocks, there is nothing like Dividend Stocks to provide a growing income into the future. Dividend stocks found in many dividend investors’ portfolios include companies such as: McDonald’s  Corp. (MCD) [analysis], Johnson & Johnson (JNJ) [analysis] and The Coca-Cola Company (KO) [analysis].

Finally, you can choose not to prepare. In June 2008, I wrote about a retirement-age couple that would never retire because they chose to live life on the edge and always spent a little more than they made. Over the last year the noose has continued to tighten on Bill and Jackie (not their real names).  Due to the economy and health issues work has been hard to come by. Their house is one step away from foreclosure and on the market with no buyer in sight. Bill needs surgery and the family continues to grow weary of providing for them.

Life is a choice. You can choose how you live, but you cannot choose the consequences of how you live.

Full Disclosure: Long AGG, BLV, EFA, IYM, JNJ, KO, MCD, VFINX, VTI. See a list of all my income holdings here.

Before 2008 when the U.S. Securities and Exchange Commission authorized the creation of actively-managed ETFs, all U.S. ETFs tracked an index. It is not surprising that the older ETFs track the most popular indexes such as:

• S&P 500 Depositary Receipt (SPY) tracks the S&P 500 Index
• Vanguard Total Stock Market ETF (VTI) tracked Dow Jones Wilshire 5000 Composite Index through April 22, 2005, and performance of the MSCI US Broad Market Index thereafter.

Given the efficiencies of ETFs there has been a great deal of interest in them.  Despite 2008′s market crash, there were 160 new exchange-traded funds launched with net inflows into U.S. equity exchange-traded funds of $120.8 billion.  ETFs are gaining market share at the expense of mutual funds. In 2008, there were only 21 new mutual funds and U.S. equity mutual funds saw a $162.4 billion net outflow. Many mutual fund companies have seen the writing on the wall and have decided that if you can’t beat them, join them.

At the time of this writing, Vanguard offerd 38 ETFs covering just about every conceivable sector and niche. Here are several random samples:

• Long-Term Bond ETF (BLV) tracks  Lehman Brothers Mutual Fund Long Government/Corporate Index
• Dividend Appreciation ETF (VIG) tracks the Dividend Achievers Select Index
• REIT ETF (VNQ) tracks Morgan Stanley REIT Index
• FTSE All World ex US (VEU) tracks the FTSE/(R)/ All-World ex USA Index

ETFs can be used to fill a void where you either don’t have the expertise or the time needed to pick individual stocks, such as international dividend investing. Like any other index, an ETF will likely hold securities that you would not buy otherwise.

Full Disclosure: Long VTI, BLV, VIG, VNQ

References
- Forbes: Attack Of The ETFs
- Wikipedia: Exchange-traded fund
- SEC: Exchange-Traded Funds (ETFs)