This month’s theme is likely to make you uncomfortable.

As with last year, I am devoting one month to the difficult yet essential issue of organizing your finances.  Last month we talked about change and this month, we address one of the most difficult changes facing all of us: the economic crisis. Specifically, we are going to take a detailed look at one of the most challenging aspects of financial organization–retirement planning. This is one area of my own financial planning where I have a lot of questions.

My husband and I take care of the basics in terms of putting money away for retirement but what we should be doing to follow that money and strategize our investments is still a bit of a mystery. Adding to my uncertainty in this area is the current federal budget crisis and the sad state of the U.S. Social Security system. My husband and I are lucky to still have decades until retirement to learn what we should be doing and fix our past mistakes but the clock is ticking and it is time to get Ruly on this issue.

In our case, my husband and I will most likely not receive a pension or any other guaranteed source of retirement income. Yes, we are eligible for Social Security but, as we will discuss later, I am not counting that as solid yet. It is most likely that whatever income we receive in retirement will have to come from our own savings. And yes, we will have to save a LOT to make that happen.

There are a lot of news stories about how terrible the U.S. 401(k)/IRA and other retirement planning systems are–that they are ineffective at helping people save enough for retirement. While those criticisms may be very valid, in cases like ours, hearing a whole lot of negative information without any strategy is not helpful. We don’t have any other choice. We have to find some way to make the current system work for us. Most people are in the same boat.

If you are lucky enough to have a pension, we will discuss why you might want to be careful in how you account for that in your planning. The current federal and state government deficits, as well as what is happening to pensions in the private sector, warn that anyone counting on a pension as their primary retirement income should have a Plan B as well.

This month’s focus is not to direct you how to invest your money. That is the role of professional investment advisers. Rather, the focus is to understand the issues surrounding retirement planning, identify various scenarios you need to account for in your contingency planning, and find organizational tools to help you track your retirement investments. Armed with information, you will be better able to make your own decisions or discuss options intelligently with your financial adviser.

To start the month off, I wanted to highlight 10 lessons we all need to learn from the current economic crisis. We have the benefit of learning from the hardships, bad luck and mistakes of prior generations. While we need to have compassion for those currently facing these troubles, we also have the duty to learn from their misfortune and avoid falling into the same problems ourselves. The advice below is tough love. It is brutally honest. It is hard to accept. We may already be in some of these traps ourselves but it is our task to find our way out.

10 Tough Love Money Lessons from the Economic Crisis

1. Unforeseen Crises Will Happen Periodically. Our economy is always changing. Jobs and industries that are “safe” today are gone tomorrow. Taxes go up and down. Gas prices go up and down. The cost of living changes. Natural disasters strike. There is no sure way to riches. Hard work and dedication sometimes don’t pay off. Our best assets are flexibility, knowledge and creativity. You may need to plan more than one career. You may need to move to another location. You may make a lot of money some years and none the next. Recognize when you are having “good years” and set money aside. Assume that life will throw you a curve once in a while and be ready to react.

2. Saving Has to Become Part of Every Family’s Financial Planning. In the past, it was often sufficient, and even financially sound, to live off of your pre-retirement income with little savings, and in retirement live within the means of your pension or Social Security income with little savings. Today, this does not apply. If you spend every penny you take home and save little to nothing for retirement and/or emergencies, you are living beyond your means, no matter how low your income is.

3. Home Equity is for Emergencies Not Luxuries. Many families have an enormous amount of their net worth tied up in their homes. We have all seen the painful consequences of tapping that home equity for discretionary spending, most often for home improvements, debt consolidation or college expenses. If you don’t have enough money for your discretionary spending without tapping your home equity, chances are you bought a home you cannot afford or you can’t afford the discretionary spending.

4. Don’t Base Your Planning on “Average” Investment Returns. Nearly every investment presentation you will see bases the growth of your money on “average” returns—a return based on years of data, smoothing out the high years and the low years. This is often an optimistic, confidence-inspiring number, perhaps around 7-8% annually. In the event “average” does not occur (as it has not for the past 10 years or so), you can wind up painfully short of funds. For most people, we are going to sleep better at night using the “low case,” assuming investment returns will be low. If you make your planning work using the “low case,” then if the “average” (or better yet the “high case”) comes to pass, you are sitting pretty.

5. Employment Prospects Can Dwindle Starting in Your Mid-50’s. If you listened to this wonderful and interesting Marketplace Money radio broadcast on Money Through the Ages , you get the impression that most people don’t get serious about their money until their 40’s and in their 50’s they really buckle down and shovel away as much money for retirement as possible. This worked OK in the past. However, the current economic crisis tells us that this strategy is extremely risky. Take, for example, this former bank executive profiled on NPR who was laid off and after 26 months finally found an hourly part-time job in data entry.  Unfortunately, we have to accept that age discrimination is still alive and well in the workplace and that as the pace of technology increases, our skills become out of date unless we work hard to keep them up. Our employment prospects may start to decline as we age and we should not base our savings and financial planning on the assumption that our income will consistently rise until the date we retire. Our incomes could easily stagnate or decline as we age. Making the most of your employment prospects while you are younger and saving as much as possible during all of your working years are key strategies for success.

6. Benefits You Don’t Control Can Be Reduced, Eliminated or Modified. This is a key lesson for anyone counting on a pension. Five years ago, Frontline discussed retirement planning and showed what happened to airline employees whose pensions were cut by 30% during a bankruptcy proceeding. State and federal governments are now facing dire economic problems and a large number of pension plans are grossly underfunded. Anyone counting on a pension would do well to plan conservatively for the ultimate payout amount. For example, one of my husband’s past employers was one of the last private employers to still offer a pension to employees after a certain number of years of service. My husband watched a friend dutifully fulfill the minimum service term then resign to take another position. To the friend’s surprise, fine print in the pension plan allowed for a payout in today’s dollars of the pension amount in certain cases. So, rather than sitting back in retirement and watching the checks roll in, the friend had a relatively small sum of cash to manage himself for 30+ years and hope it would pay out as much in the end.

7. Status Symbols Are Changing. We are currently looking at a seismic shift in status symbols. Things that we may have devoted a lot of our time and effort to obtain may be valued far differently by younger generations. For example, owning a home used to be a major status symbol but the need for flexibility and mobility of today’s workforce may soon make that dream change.

“[W]e really don’t need an ownership society as much as we need an innovation society–one where workers are flexible and willing to move wherever there is a job opportunity.”

–Marilyn Geewax, NPR Senior Business Editor, Pursuing the American Dream, By Renting, NPR Weekend Edition Sunday, March 27, 2011.

From the many families we have known who were split apart across states while the husband traveled for work and the wife and kids stayed home to try to sell the house, this advice does make some sense. Anyone who owns a home also knows that homes require a lot of money to maintain. Homes are often not an “investment” so much as they are an expense. Our children may choose not to own homes. Our own homes could lose value due to decreased market demand. Similarly, college education may be seen very differently by future generations in light of the difficult job market for new graduates and the burden of student loans.

8. Be Ready to Manage Complex Financial Decisions Yourself. Current trends in reforming government health care and retirement expenditures will have a significant impact on my generation. Most of the proposals advocate some form of “do it yourself,” as in “Here is your benefit amount, do with it as you will but don’t ask us for more.” My generation and future generations will likely depend on the government less and less in retirement for either health care or retirement benefits. Many of these functions will likely shift to the private sector. It remains to be seen whether this will be positive or negative but the uncertainty is stressful and the burden on individuals to organize personal financial planning in these areas will increase.

9. Never Take Good Health for Granted. The biggest wild card for all of us is health. Everything changes when your health changes. There are some factors in health we can control, such as eating well, exercising, lowering our stress levels, maintaining health and disability insurance and keeping up with our medical appointments. We can also plan to get our financial house in order before an age where health issues are likely to be a problem. Having your house paid off and retirement savings goals met by age 65, for example, would be one step in this direction. Sometimes health conditions take us by surprise at any age, however, and then we have to draw on the love and support around us to get us through.

10. Your Adult Children and Aging Parents Will Most Likely Need Your Financial Support At Some Point. As though you don’t have enough to worry about for your own retirement needs, we have seen that children are more frequently returning home after college or requiring support from mom and dad to get started on independent living. Likewise, as parents age, the costs of health care and declining retirement income often dictate that children need to provide financial or other assistance to help them maintain their health and independence. A June 2010 Money Magazine article estimated these costs at $7,660 per year for adult children and $5,534  per year for care of aging parents. Factoring this into your retirement planning now could prevent heart-wrenching surprises later.

Do you agree with the above list?  What lessons have you learned from the economic crisis? What questions do you have about your own retirement planning? Please share in the comments.