The Three Legs of Retirement: You’re About to Fall Off Your Chair

Years ago, when discussing how to plan for retirement, a common metaphor used a three-legged stool to describe the three sources of received income during non-working years. These three sources were: Pension, Social Security, and Personal Savings.

Remember when you were in school and you would lean back in your chair to teeter above the ground on the legs of the chair? You probably started with the front two legs of the chair in the air to find your balance. Then, if you dared, you tried to lean to one side to balance on just one of the chair’s back legs. It was that rush of excitement to get you through those long history lectures! Well, you could say that right now you are teetering on your chair¾and your fate of either falling or returning back to solid ground depends on your financial moves.

Why is this the case? Times have changed since the above metaphor made sense to individuals. Pensions have basically gone extinct, Social Security is in trouble and surrounded by speculation for its future, and personal saving is not rewarded its proper priority. While 401(k)s have attempted to take the place of pensions for the last few years, we are seeing a shift towards more companies and start-ups not offering 401(k) plans to their employees. 401(k) plans are a great retirement savings vehicle and should be taken advantage of. However, in many cases, they do not offer the same benefits that pensions once did; they fall behind. Our hope is that 401(k)s will not follow the same path as pensions and phase out. However, we have to account for that leg of our stool being a little rocky at this point.

Many professionals see the future of Social Security as very bleak. With more baby boomers nearing retirement and less young workers in the workforce, it is hard to keep up with the equal benefits that we saw 50 years ago. Some economists believe that Social Security will not fail but rather we will have a completely different system in the future. While this may seem encouraging, we must also be aware that this means putting a third of our retirement plan into the hands of something completely unknown. Many people, both in the past and currently, plan to rely on Social Security for a fair portion of their retirement income. If there is no such system, or a different system in the future, it will be catastrophic to those who relied so heavily on this leg of the stool. Whoops, you just lifted off the third leg…you are now teetering on that final back leg here.

The only leg of the stool that we can control and can be certain about is our personal savings. However, today’s society fails to place the right amount of importance on this crucial aspect of retirement planning. If we do not do our part to contribute to our future, we are going to be living a stressful retirement—heck, you might not even get to retire. If the other two legs of the stool are not available, or do not provide enough stability for your lifestyle in retirement, you are going to be balancing on just one stool leg for the rest of your life. One way you can supplement this is to really focus on your individual savings plan. You can open an IRA (Individual Retirement Account) to help increase the likelihood of having a comfortable retirement. If you do have a 401(k) plan at work, be sure to contribute to it.  Right now, you are teetering on that one leg, if you do not have enough personal savings to keep you balanced, the end result will be a dangerous fall. If you have worked hard to build a personal savings, you have a better chance of returning back to solid ground from that teetering position when the teacher yells at you!

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Financial Sisterhood TM, 2016