Retirement Saving Using the 3 Legged Stool Model

The three-legged stool is considered the basic model of retirement saving. 

Since the late-1940s, the metaphor has been a way to describe saving for your future.

No one how the concept started, but it’s one that stuck. While the legs of the stool were different in the past (they relied heavily on other retirement options), today, those legs have grown and transformed into a different kind of stool.

The problem is: most Americans don’t even have a stool, let alone a steady one.

The First Leg – Social Security

Having no stool is attributed to many factors. According to the 2005 Retirement Confidence Survey (RCS), released annually by the Employee Benefits Research Institute, 31% of current retirees believe that Social Security will be enough to sustain them for the rest of their lives.

You don’t have to be a government expert to know that Social Security will not last forever.

Even if Social Security lasts, most agree that benefits for future retirees will reduce for the system to survive. 

Essentially, one of the stool’s legs is a bit shorter and a bit weaker.

Care to have a seat? Me neither.

Those who have only relied on the one leg of retirement planning their whole lives may find that the stool will become difficult to depend on in their later years. But this can all be prevented. After all, there are still two legs left.

The Second Leg of Saving for Retirement – A Company Pension Plan

The second leg in the modern stool era is a company pension plan. In May 2005, United Airlines was allowed to default on its employee pension plan. It’s a move that will save the company millions of dollars but will leave its employees looking for alternative sources of retirement income.

Most companies today are switching to 401(k) plans, where the employer has the option to match a percentage of the contributions to the plan. 401(k) plans are more secure than pension plans, and they have more rollover options, but employer-sponsored retirement funds are simply one more option in a program that should contain several strong legs.

It would be best if you worked with a financial professional to craft a specific 401(k) strategy, including rollover options so that you’re confident the second leg can bear some retirement weight.

The Third Leg of Retirement Saving – Personal Savings

The final and increasingly popular leg of the stool is personal savings. Sadly, many people feel they have no effective options for future retirement savings.

 In times of shaky employer-provided retirement funds and uncertainty over Social Security’s future, a real personal savings plan remains the strongest of the legs, but ONLY if you plan for your future.

You’ve probably heard of IRAs before, but can you name all the different types and which one suits you best? IRAs are specific retirement funds set aside for you to save for the future. You can also fund your retirement by investing in mutual funds or any other form of securities you wish.

Depending on your current financial situation, you’ll want to consult a financial expert to decide what plan is best.

Here are a few simple steps to start

Here are a few simple steps to start exploring your personal savings retirement options.

Find an independent financial professional

  • The first is to contact an independent financial professional who can counsel you on more options and details regarding your retirement.

Calculate your post-retirement incom

  • The second is to calculate your post-retirement income. Calculating your post-retirement income is one quick and easy way to prepare for retirement.

According to the RCS, currently, only 4 in 10 workers have done the simple calculating needed to determine a sufficient post-retirement income.

Calculating your post-retirement income is relatively easy and essential to planning for retirement.

Often, people don’t believe they’ll need a lot of savings to retire. Sometimes, seeing the results can light a fire underneath your retirement plan and cause you to rethink your savings strategy.

One of the biggest mistakes future retirees can make is planning their retirement alone. While something can be said for a “can-do” spirit, trusted financial professionals are more likely to find better ways to help you save money for retirement.

When asked about the most helpful tool for saving for retirement in the 2005 Retirement Confidence Survey, the most significant percentage of workers surveyed (27%) said they believed advice from a financial professional was the most helpful. Aside from post-retirement income, it’s also important to have a long-term care outlook in case long-term medical care is needed after retirement.

While Congress debates the future of Social Security, there is always hope the program will be saved and improved. But there are never guarantees in life or politics.

Only you can decide what kind of retirement plan you’ll have and how comfortably you’ll be able to live in the future. If you choose to rely solely on Social Security, you may find the going to get rough in the future, especially considering inflation and rising healthcare costs.

Suppose you choose to plan carefully with a financial professional. In that case, you have a personal say over your future instead of leaving your future financial security in the hands of elected officials or employer-sponsored plans.

Filling your retirement with less worry and financial strain, you’ll have more opportunities to live out your days actively rather than just passing the time sitting on your wobbly stool.

Retirement today is a scary prospect for many folks. Financial, Health and Future challenges! How prepared are you?