Is It Time to Throw Out the ‘Three-Legged Stool’?

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By SJS Managing Director Jennifer Smiljanich

As a college student, I remember learning about the “three legged stool” as a metaphor for retirement security.  Each leg of the stool represented a different financial resource, and all three were needed to provide a solid foundation for retirement.  So what were these legs?

1. Social Security

2. Private Pensions

3. Personal Savings and Investments

In surveying the stool today, it seems as though the legs are in need of some shoring up – or maybe even replacement. For those of us born in the mid-1960s and later, there may be uncertainty about what Social Security could look like when we finally reach full retirement age. Likewise, the idea of working for a company or a public entity for 30 years and collecting a guaranteed pension is almost unheard of.  Which leaves us to rely on personal savings and investments. The statistics here are somewhat grim – the personal savings rate has been on the decline for the past 30 years, according to statistics from the Bureau of Economic Analysis. Americans are currently saving a little more than five percent of their disposable income, which is only about half of what they were saving in the 1970s and 1980s.[1]

So maybe it’s time to throw out the three-legged stool analogy and start over.  Recognizing that Social Security and private pensions are less secure or common than in the past, it’s up to us to do more individually to save for retirement. What tools do we have to use?

Company Retirement Plans

If you are fortunate to be one of the millions of Americans with access to a company retirement plan, consider it to be a gift.  Many companies offer employer matching – your company will contribute money to your account as long as you contribute an equal amount, up to a set percentage. Who says there’s nothing free anymore? You may contribute as much as $18,000 per year to a 401(k) plan – or up to $24,000 per year if you are turning age 50 or older in 2017.  Other retirement plan types may have different limits, but still allow you to contribute thousands of dollars per year.

Individual Retirement Accounts (IRAs)

If you do not have access to a retirement plan, that doesn’t mean you can’t save for retirement. You may save up to $5,500 a year in an IRA, or up to $6,500 if you are turning age 50 or older in 2017.

After-Tax Savings

If you maximize contributions to company retirement plans and IRAs, you still may be able to save money in after-tax investment accounts.

So how much is enough?  The right amount will depend on how much you earn and what type of lifestyle you want to lead during your retirement.

Research by Wade Pfau, Professor of Retirement Income at The American College, suggests that a “safe” savings rate might be as high as 20 percent, depending on the amount of time before retirement and the length of time in retirement.[2] A 2015 study by Aon Hewitt suggests that saving about 11 times your final salary level may be a good target for retirement at age 65.[3]

We may be more likely to spend money if it just sits in a checking account – after all, it can make us feel wealthier. If instead we save or invest our money before it ends up in a checking account, perhaps we won’t be as inclined to spend it. Think about it – could you save up to 10 percent of your income without significantly affecting your lifestyle?

Saving as early as you can, and as much as you can, gives you the most options and flexibility when you reach your retirement years. And who doesn’t love options?  You might be able to leave a full-time job to start a second career, to spend more time enjoying your favorite hobby, to make memories with children and grandchildren near or far, or to volunteer for the cause you feel passionately about.  If you have questions, please talk to us. With MarketPlus Investing®, we can project how your savings may grow and design a portfolio to help you achieve your specific financial goals.

Be mindful of your future self – 10, 20 or even 30 years from now.  It’s time to reimagine what your retirement security looks like, one dollar at a time.

Sources:
[1]: “United States Personal Savings Rate.” www.tradingeconomics.com, March 2017.

[2]: “Safe Savings Rates: A New Approach to Retirement Planning Over the Life Cycle.” Journal of Financial Planning, May 2011.

[3]: “The Real Deal: 2015 Retirement Income Adequacy at Large Companies.” Aon Hewitt, 2015.

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