For many years, Americans met their retirement needs through three sources: employer-sponsored pension plans, Social Security income, and savings and investments accumulated through company plans or individual accounts, the ‘called “three-legged stool”. But today, that stool is shakier than before. What can you do to strengthen it?
To begin with, the three legs of the stool face challenges. Let’s consider them:
Employer’s pensions – A generation ago, workers at many companies could count on a fixed monthly pension to see them through their retirement years. Today, pensions, also known as defined benefit plans, are found primarily in public sector employment, as most private sector employers have replaced their pensions with 401(k) plans and the like. These plans can be quite effective in helping build retirement resources, but they place most of the responsibility for saving on the employee.
National Insurance – Social Security has come under financial pressure because the ratio of workers to retirees has decreased significantly, according to the Social Security Administration’s 2021 Board of Trustees report. Several proposals have been presented on how to improve the long-term financial security of the Social Security system.
Personal savings and investments – When it comes to building retirement savings and investments, the picture is somewhat uneven. The national savings rate has risen in recent years, but more than half of working Americans still say their retirement savings aren’t where they should be, according to a 2021 survey by Bankrate, a personal finance website. And the same survey found that just over half of investors with a 401(k) or IRA have taken early withdrawals, meaning they withdrew money before retirement. Also, we may be waiting too long to even start saving/investing for retirement. A survey by Age Wave and Edward Jones found that respondents started saving for retirement at an average age of 38, but most said they should have started saving a decade earlier.
You have options to improve some parts of your own three-legged stool. For example, no matter what happens with Social Security, you still get to decide when you start getting paid. You can start collecting benefits as early as age 62, but your monthly checks will be larger if you wait until your “full” retirement age, which will likely be between 66 and 67. You can even delay taking benefits until they “max out” at age 70.
When it comes to a pension, you can’t control what’s available to you through your employer, but you can create your own retirement income stream by contributing as much as you can afford to your 401(k) or other sponsored plan by the employer and increasing your contributions whenever your salary increases. And you can also contribute to an IRA or other investment vehicle to grow your retirement funds even more. Try to leave these accounts untouched until you need them for retirement. This will be easier if you’ve created an emergency fund, with the money kept in a liquid, low-risk account, to pay for unexpected costs, such as those arising from a major car or home repair.
The three-legged stool may not be as universal as it once was, but you can still build a solid structure to support your retirement needs well into the future.
Jennifer Barrett (AAMS) is a local financial advisor at Edward Jones.
225-612-0413 | jennifer.barrett@edwardjones.com
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Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. You should consult your estate planning attorney or qualified tax advisor regarding your situation.
