A new “three-legged stool” for retirement

Last updated on: August 16, 2016 at 9:45 am by Jane the Actuary

A new “three-legged stool” for retirement 2016-08-16T09:45:59-06:00 Jane the Actuary

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Yes, so it’s a bit presumptuous of me to announce this, but it’s something I’ve been think about.

You likely have heard of the “Three Legged Stool” concept of retirement: your retirement income comes partly from Social Security, partly from your employer, and partly from your own savings. Just as a stool can’t stand with only one or two legs, so, too, retirees need income from all three sources, and can’t rely solely on Social Security or their employer pension.

Yes, this analogy is rather old, and just doesn’t make as much sense in a world of 401(k) plans in which employer contributions are contingent on employee contributions, and all go into the same account. There is, in modern retirement savings, no way that an employee really could think “my employer pension is all I need” — except, of course, for public pension plans in which pay replacement is so generous that personal savings is much less important.

Now the experts try to propose all kinds of replacement “stools.” And, in that spirit, here’s mine, a three-legged stool to address the Big Picture of retirement:

Leg One: adequate assets at retirement. This includes everything, whether it’s a 401(k), other savings, your paid-off house, and, if it exists, the value of any pension.

It is clearly important that Americans increase their assets at retirement, and that the government make this more achievable, or, at least, don’t make it harder.

But here’s leg two: Americans need better ways to convert these assets into income during retirement. For all that the experts tell us to save, save, save, and the government is busy trying to create new vehicles for saving, there is a serious deficiency here. “Annuities are garbage,” we’re told, with too many fees to be worth the money, a scam by financial advisers who want to help themselves to your money as commission. “Withdraw 4% a year” — but with no guarantees that the money will last, and no good answers as to how to allocate assets (especially in the current economy, with bubbley stocks and in-the-toilet bond interest rates). And for the most part, it’s my impression that retirees, in general, just make their best guess, or quite often, treat the IRS’s mandatory annual distribution (which really just means the amount you have to move to an after-tax account) as the amount to spend for the year.

Senator Harkin’s “USA Retirement Funds” tried to deal with this by means of pooled retirement plans. Alternatively, there are proposals for mandatory annuitization (yeah, yeah, “it’s my money so how dare the government force me to annuitize it”) in part because only when annuity purchasing is commonplace will costs go down.

This is a complex issue, but it still needs to be addressed every bit as much as the goal of increasing Americans’ asset accumulation.

And, of course, one aspect of post-retirement income can be a part-time, low-pressure job, or even delaying retirement altogether, but you can’t predict whether this will be possible for you, or whether job loss or disability will prevent this.

And leg three: you know this one if you’ve read my posts about my parents. Americans need better resources for living well in retirement, and Americans need to better plan for how they will live in retirement. It isn’t as simple as going to a retirement party, getting a gold watch, and then playing golf and playing with the grandkids until you kick the bucket.

But life can get in the way.

Maybe you have a hobby — you like to go sailing, for instance, or skeet shooting. What will you do when you can’t sail any longer or when the skeet shooting place nearby closes its doors? Maybe you like to spend time with your grandkids. What will you do if they move away because of a job transfer?

Maybe you have a home that you’ve lived in so long that you’ve paid the mortgage. What will you do if you struggle to climb the stairs?

How will you keep your mind and body active?

And, even if you do everything right, what if your spouse, well, doesn’t, and you spend your “golden years” being a caregiver? (Which can happen, of course, even if you do/your spouse does everything you’re supposed to do to prevent it.)

This is a real challenge, for Americans as they think about retirement, whether they understand this or not, and for policy-makers of all kinds.

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