Easy Money: The Three-Legged Stool

One of the most fundamental concepts in retirement planning is the three-legged stool. Why? Go ahead and imagine a three-legged stool. It’s not a four-legged stool, it’s a three-legged stool, so every one of those legs has to be perfectly aligned for the stool to work. If you shorten one, what’s going to happen? You’re going to tip over. If you make one too long, you’re going to tip over. The same thing goes for retirement planning, and the three-legged stool represents three different things.

Leg #1 is Social Security; almost everyone has it in the United States. There are a few pension plans that may make you opt-out, but for the most part, almost everyone has that first leg. There are a lot of people who don’t have the other two, which makes retirement a little tricky, but most people have Social Security as the first leg. A lot of people think they know exactly when to take their Social Security out at age 62, 66, 70, etc., but there are a few different factors to take into account if you want to get it right for your situation. Having that plan is very important, but developing that plan is also dependent on the other two legs.

The second leg is Guaranteed Income, and traditionally that guaranteed income came from pensions. Well as you know, not many people today have pensions. Back in the ’50s and ’60s and ’70s, pensions were very common to have. Now they’ve become less and less common. Why? Because people are living too long and that longevity has hurt the popularity of pension plans. Because many people don’t have a pension plan, sometimes they’ll look for other forms of guaranteed income. Some people will use annuities, life insurance, or some type of guaranteed CD. Which of these may be best for you depends on your situation, but with the decline of pension plans, these products are used as the guaranteed second leg.

And the third and final leg is Retirement Savings. So this will typically come from IRAs or 401Ks or just money that you’ve saved up throughout your life towards retirement. This is the leg that is pretty commonly neglected. People say, “Well, I’ve done a really good job at saving,” or, “I’ve earned a lot of money,” or, “My interest rate is really good.” They think that’s all they need for that leg, but that’s not true. That leg is the most important part to adjust, based on where the other two legs are. So my recommendation is to take a look because you want to make sure that your Guaranteed Income leg, your Social Security leg, and your Retirement Savings leg all match up so you have a balanced three-legged stool.

A lot of financial advisors focus on Social Security and don’t really talk about the other two because they don’t really get paid on it. Most of them get paid on the money that they manage, so the other two are more of a burden. But to have a true retirement plan, you need to make sure that all of those line up and sometimes the account that earns the most in your investments is not the one that will keep the rest of your plan balanced. So my recommendation is if you haven’t looked at how all three of those legs combine, look for a financial advisor and say, “I want the three-legged stool,” and figure out how that fits into your retirement plan.

Securities and advisory services offered through Madison Avenue Securities, LLC, member FINRA SIPC, and a registered investment advisor. Madison Avenue Securities, and Don Anders are not affiliated companies.