The Three-Legged Stool of Retirement Planning

Golden egg laying in a bird's nest representing saving for retirement.
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The three-legged stool is a metaphor for how the post-World War II generation looked at planning for retirement. The three legs represent an employer pension, employee savings, and Social Security. You need each one to build a strong retirement foundation. Without one, the three-legged stool would not function.

This metaphor is often attributed to Franklin D. Roosevelt, who created the Social Security program. However, he did not actually use the term. The origin may have been a man named Reinhard A. Hohaus, an actuary working for Met Life Insurance. During a 1949 speech on Social Security, he talked about a stool with three legs: Social Security, private insurance, and group insurance.

Regardless of where the term actually came from, the concept of a three-legged stool is often applied to retirement planning.

Does the Three-Legged Stool of Retirement Still Exist?

For many workers in the United States, the three-legged stool no longer exists in its original form. Pensions and group insurance plans once offered by employers are rare in the twenty-first-century workplace.

In 2017, a study found that 51% of workers at Fortune 500 companies were accruing pension benefits. However, most of these were older workers whose pensions had been part of their benefits package when they were originally hired. Only 16% of Fortune 500 companies offered any type of defined benefit pension plan to new employees in 2017, down from 59% in 1998.

Pensions Being Replaced by 401(k) Plans

Instead of offering a defined benefits plan, such as a pension, many employers now offer a defined contribution plan such as a 401(k). Since employees make contributions to these plans through their paychecks, a 401(k) is a form of personal savings rather than an employer pension.

Some employers do contribute to their workers' retirement by offering an incentive match of up to 6% of what workers save, and the number of employers offering a match seems to be increasing.

In 2006, around 76% of employers offered 401(k) matching. That number dropped to 67% in 2009 after the financial crisis but was back up to 73% by the start of 2012.

Key Takeaway

Though a 401(k) match doesn't provide the same security and benefit as a pension plan, it does create a small second leg to add to your stool. If your employer offers any sort of contribution to your 401(k), you should contribute at least enough to get your full employer match.

The Future of Social Security

Social Security has provided retirement income to qualified workers since it was signed into law in 1935. Since then, many Americans have depended on the program to provide at least a portion—and in some cases, all—of their retirement income.

The dollar level of the Social Security trust fund reserves is projected to be depleted by around 2035. As the baby boom generation ages, the number of retirees is expected to significantly outpace the number of younger workers, straining the ability of Social Security to keep up.

This does not mean that Social Security benefits will disappear completely. Without any changes, the payroll taxes still being paid by younger workers will be enough to fund about 79% of scheduled benefits. Potential fixes to Social Security include increased ages for full benefits or higher earnings limits.

Key Takeaway

After 2035, Social Security will likely provide reduced benefits compared to the levels that retirees currently receive. Social Security will likely continue to exist as a leg of retirement planning, though it may be significantly smaller in the future.

Personal Savings for Retirement

Personal savings make up the final leg of retirement planning. As pensions become less common and benefits from Social Security are reduced, personal savings will become more important for future retirees.

The best way to determine if you are saving enough for retirement is to run a basic retirement calculation at least once per year. When calculating your retirement savings, you should include any and all of the three legs of retirement planning that you expect to be available to you. However, it is wise to focus on your personal savings, as the other two legs of the stool may become more and more unpredictable the closer you get to retirement.

The three-legged stool of retirement planning may still exist, but its legs are unbalanced. With the decline of pension benefits and the uncertain future of Social Security payments, future retirees will likely depend on personal savings to fund their non-working years.

Article Sources

  1. Social Security Administration. "Research Notes & Special Studies by the Historian's Office." Accessed Mar. 16, 2020.

  2. Wilson Towers Watson. "Retirement Offerings in the Fortune 500: A Retrospective." Accessed Mar. 16, 2020.

  3. Charles Schwab Corporation Pressroom. "More Employers Add 401(k) Match, Advice and Automatic Features to Drive Participation and Savings, Says Schwab Data." Accessed Mar. 16, 2020.

  4. Social Security Administration. "The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds," Pages 3-5. Accessed Mar. 16, 2020.