Dad sat on an old three-legged stool in his workshop while examining the brakes on several old Fords we restored. Many words of wisdom were gleaned as I served as an effective “tool runner.”
For decades many financial professionals used the concept of a three-legged stool to describe the three most common sources of retirement income: Social Security, an employer’s retirement or pension plan along with personal savings.
If you are a private sector American worker hovering in the 40-60 age category, how confident are you in your prospects for a “happily ever after” retirement?
One does not have to dig too deeply to recognize the shakiness of the proverbial three-legged stool for many prospective retirees today. First, do your own research regarding Social Security. Based on the June 2013 annual Trustee’s Report, the Social Security trust fund will be exhausted by 2033. After 2033, income will cover just 77% of scheduled payments. Our Social Security system needs help, but few politicians have had the courage to take it on and so they keep kicking any potential fixes down the retirement road.
Second, since 1979, significant changes have occurred in the types of employment-based retirement plans. In short, Defined Benefit Pension Plans in the private sector have all but evaporated while Defined Contribution Plans like 401k’s have soared. These plans are not the same! The later lacks the essential element of actuarial science. Clearly, there has been a major transfer of risk and responsibility for an individual’s retirement from the employer to the employee. Unfortunately, much of this transfer has occurred with little employee education. Buyer beware!
Third, is personal savings. This leg was only supposed to be needed if the other two legs faltered. Beyond employer retirement plans, there is an alphabet soup of Individual Retirement Accounts (IRAs), but many Americans are not taking sufficient advantage of such plans.
US News & World Report, March 19, 2013, found that “28% of Americans say they have less than $1,000 saved for retirement.” The 2013 Retirement Confidence Survey by the Employee Benefit Research Institute found that “60% of workers report they have saved less than $25,000 for retirement (excluding the value of their home and pension plans).”
Understandably, many pre-retirees feel an unsettling angst when contemplating any hopes for retirement. How to chart a way forward? The first step is assessment, then learning how to execute the right retirement income strategies. This is why I developed the “Retirement Income Wellness Check Up.”
This check up asks participants 10 important retirement income questions. Seminar attendees respond privately with a 1, 2, or 3 on their individual check sheets. When answering each question, 1 means the attendee is “absolutely confident”, 2 means “somewhat confident” and 3 means “not very confident.” At our seminars, sufficient time is spent discussing and educating on the importance of each retirement preparedness question.
At the end, attendees add up their scores to determine if their prospective “retirement income is healthy” (Score: 10), “need a doctor” (Score: 11-20) or if their retirement income “needs to be rushed to the emergency room” (Score: 21-30). The levity generates chuckles, which are powerful motivators to move forward with what matters most.
Test your level of preparedness by answering the questions below:
- Social Security Timing – Based on when you plan to take Social Security benefits, are you confident you will receive the most income available?
- Withdrawal Rate Risk – Do you know the correct percentage to withdraw from your assets each year to insure you don’t run out of money?
- Fluctuating Interest Rates / Sequencing of Returns – Do you have a strategy to combat the threat of fluctuating interest rates and sequencing of returns?
- Assets Only Retirement – Since an “assets only” retirement often falls short of income expectations, do you have a strategy to sufficiently close the retirement income gap?
- Actuarial Science – Do you have a strategy to take advantage of actuarial science?
- Combat Survivorship Risk – Are you positioned to replace lost income when a spouse passes?
- Enhance Personal Legacy – Have you thought about and/or provided for your personal legacy?
- Volatility Buffer – If assets are to remain at risk in retirement, do you have a formal volatility buffer strategy?
Current Financial Advisory Services – Will your current strategy get you down the retirement mountain without running out of money?
Secure Guaranteed Lifetime Income – Do you have a guaranteed flow of income that cannot be outlived?
Add up your score! Do you need a doctor?
Being an active learner in one’s financial life is essential for success. Abdication is not an option! Yes, the three-legged retirement income stool has changed dramatically, but there are answers to increasing one’s retirement income, often without saving any more money. Do you know these strategies?
Contact our office regarding holding an educational seminar at your industry association or place of employment. Take ownership of your financial future today! Taking the Retirement Income Wellness Check-Up is a great start. Doing so will give you a more credible claim on financial peace.