The “three-legged stool” is an old phrase that many financial planners once used to describe the three most common sources of retirement income: Social Security, employee pensions, and personal savings. It was expected that those three sources of income would combine to provide secure retirement income. None of the three was expected to support most Americans in retirement on its own.

Fast Fact

One leg of the stool, a pension, has largely been replaced by 401(k)s and other defined-contribution plans.

The Three-Legged Stool Has Changed: Farewell, Pensions

Times have changed, though, and so has the three-legged stool. For younger workers, the pension leg has mostly been replaced. Instead of pensions, also called “defined-benefit plans,” which were funded by a combination of company and employee contributions, workers now have 401(k) and other defined-contribution plans, also known as retirement savings accounts.

Originally, 401(k)s and other retirement savings plans were never meant to serve as a pension; they were to be supplementary savings accounts, building up the third leg of the stool. Some employers will match the employee contribution up to a certain percentage, but many are even eliminating that degree of assistance.

The State of Social Security

As for Social Security, the 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, warned that the Social Security trust fund could run dry in 16 years at the current rate of output: “Under the Trustees’ intermediate assumptions, OASDI cost is projected to exceed total income starting in 2020, and the dollar level of the hypothetical combined trust fund reserves declines until reserves become depleted in 2035."

Of course, the emphasis is on the hypothetical; the projection does not take into account changes to the system, such as later retirement ages, which are already being implemented, and it is unlikely that the U.S. government will let a meltdown happen without stepping in. The projections also do not account for rising interest rates, increased revenue, or several other factors. Nevertheless, it is a date that still causes concern. Workers in the United States can go online and review their Social Security accounts to see how much in benefits they receive at early retirement, full retirement, and age 70.

Financial advisors recommend regularly investing up to 20% of your paycheck in a retirement savings account.

Personal Savings for Retirement Remain Low

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 tax-advantaged retirement plans such as IRAs and annuities to build their retirement nest eggs.

Financial advisors recommend investing up to 20% of your paycheck in a retirement savings account regularly. The earlier you start, the better set up you are to take advantage of compounding investment returns. At the very least, advisors recommend contributing enough to your 401(k) to max out the employer match, if your employer offers one.

The Bottom Line

With pensions being replaced by retirement savings accounts, we're almost down to a two-legged stool—not something you could actually rest on securely. The government has debated possible solutions, including hybrid pension plans, creating national or state-level retirement savings plans for people who do not have one offered through their work, and even opening up the Federal Thrift Savings Plan to all Americans.

Retirement issues are tricky to fund, however, as the problem is generally in the future, making it easier to kick the can down the road than enact costly repairs. In the meantime, it may help to think of tax-advantaged retirement plans as the stool's second leg and work on building up a third leg with other savings, including investments such as real estate. Or maybe we just need a new metaphor.