What is the "three-legged stool"?

By Steven Merkel AAA
A:

The "three-legged stool" was a retirement terminology from the past that many financial planners used to describe the three most common sources of retirement income for a retiree during retireme - Social Security, employee pensions, and personal savings.

Times have changed though and so has the three-legged stool. For younger workers, one could say that there still is a three-legged stool, but the legs have changed. In place of costly pension plans, most employers have moved towards 401(k) plans which require workers to defer a portion of their own paycheck into the 401(k) retirement account. Some employers will match the employee contribution up to certain percentage, but now some employers are even eliminating the matching program. (Learn more about 401(k)s in our article: The 4-1-1 On 401(k)s.)

According to the 2008 annual report issued by the Social Security and Medicare Trustees, they estimate that the Social Security trust fund will run dry by 2041 if changes are not made to the system. It's unlikely that the U.S. Government will let this happen, but it's a date in the future that's been talked about for several years now. Each year, workers in the U.S. receive an annual Social Security statement- review this to see how much you may receive at early retirement, full retirement, and age 70. This will help you determine when you can retire.

Personal savings rates have been extremely low for U.S. workers over the last decade. Individuals will need to start saving a larger portion of their income and continue to utilize retirement based tools such as IRAs, annuities and other brokerage accounts to build their retirement nest eggs.

If you're planning your retirement, take a look at Five Retirement Questions Everyone Must Answer to get on the right track.

This question was answered by Steven Merkel.

RELATED FAQS

  1. Why are insurance companies and pension funds considered financial instruments?

    Find out why insurance companies and pension funds are considered carriers of financial instruments, and what role they play ...
  2. Can I stop working to decrease my Substantial Gainful Activity (SGA)?

    Find out how your level of work productivity impacts your ability to earn below the substantial gainful activity (SGA) threshold ...
  3. Should I purchase a master limited partnership (MLP) in my retirement account?

    Learn why investors may have to pay taxes on dividends from master limited partnerships, or MLPs, held in individual retirement ...
  4. How should I invest the money I keep on my IRA?

    For individuals who are just starting to save, certificates of deposit can be a good place to start, but the interest rates ...
RELATED TERMS
  1. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  2. Benefits Payable Exclusion

    An insurance policy exclusion that removes the insurer’s responsibility ...
  3. Self Invested Personal Pension (SIPP)

    A tax-efficient retirement savings account available in Great ...
  4. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  5. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  6. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    This Gold ETF is Fine for Traders, Not ...

  2. Mutual Funds & ETFs

    Should GE Be Part of Your Portfolio?

  3. Savings

    How Hidden City Tickets Affect Airlines

  4. Options & Futures

    Options and Roth IRAs: Do's and Don'ts

  5. Savings

    How Safe Is Venmo And Why Is It Free?

Trading Center