Have you heard of the Three-Legged Stool? It’s a metaphor financial planners and educators have used to describe retirement. The idea is that, to have a stable retirement, you need to have a three-legged stool. The legs are Social Security, Pension, and Personal Savings. The story goes that, by combining three robust legs, you can make a stable retirement. It looks like this:
Pretty cool, right? This is may be the kind of financial stability your Grandpa’s generation could look forward to. If your Grandpa had a job that was covered by a pension (which was quite common), managed to stay employed consistently enough to build savings (which was more common than it is now), and had the assurance of Social Security, then your Grandpa could develop enough wealth to reasonably retire at age 65. Of course, things have since changed. Let’s take a look at the metaphor for you Dad’s generation:
So, your Dad’s unlikely to have a pension. There are still some members of your Dad’s generation who will get a pension, particularly in professions that are unionized, but most other members of that generation won’t have a pension or will have and insubstantial pension. The idea was that they could make up for the lack of pension by saving more. Unfortunately, when you are intermittently employed due to layoffs or outsourcing, it becomes very difficult to consistently save for retirement. Consequently, we see a lot of people from the baby boomer generation postponing retirement, or simply not retiring. Instead, they work part-time or full-time while using Social Security to supplement their income.
Now, could this be our generation’s “Three-Legged Stool?” I doubt that I will ever have a pension in my future, and I bet a lot of my generation could say that. Additionally, my generation’s full retirement age with Social Security is higher than any generation before it. Also, there is talk about Social Security having insufficient assets to pay all claims in the more distant future. I, personally, speculate that Social Security will move to means testing for benefits. Either way, the “Social Security” leg of the stool seems to be slowly eroding.
So, what can we do?
It seems that the thing we have the most immediate control over is our personal savings. This is why you hear so much from me about savings money for the future. I think that my generation will need to save more than previous generations did for the same amount of retirement stability, and I think that there is some research that supports this. So, if you haven’t started systematically saving for retirement, then I strongly suggest you get started. After all, compounding works better the longer it goes.