Expert explains the 'three-legged stool' of retirement planning

 Expert explains the 'three-legged stool' of retirement planning

By Stephanie Asymkos 

Retirement planning is a lot like a three-legged stool, according to one expert.

“The three-legged stool is your Social Security, your employer-provided pension, and your own personal savings,” Bipartisan Policy Center Vice President and Chief Economist Jason Fichtner said on Yahoo Finance Live (video above). 

In theory, the three legs work in concert to achieve financial health. Each leg comes with its own external challenges and cannot be counted upon independently for financial health.

'That three-legged stool sometimes looks like a pogo stick'

Social Security is a prime example. The government-run program — which Fichtner described as akin to a trust fund — is facing a financial shortfall in the near future. With estimates pegging depletion in the early 2030s, future beneficiaries should anticipate a "20 to 25% reduction in benefits across the board," Fichtner said. 

Pension plans are another area of growing concern. Defined benefit pension plans were originally the most common types. Employees are provided with a fixed, pre-determined benefit upon retirement.  

"A lot of defined benefit pension plans no longer exist since state and local employees have it but from the private sector, there's now been a movement towards defined contribution plans," Fichtner said. 

Examples of defined contribution plans include 401(k)s or 401(b)s. 

The third leg of the stool is personal savings, which took a major hit as a result of the coronavirus pandemic. 

“Because of COVID and of course, unequal distribution of income and wealth, a lot of people aren't adequately saved for retirement," Fichtner said, adding: "People are really lacking in emergency savings."

A survey conducted back in February 2021 found that 43% of households with incomes of less than $50,000 have no emergency savings set aside.

The proposed solution for retirement equality is a government task force. Fichtner announced that 31 members of the Bipartisan Policy Center's Funding Our Future initiative — along with a handful of businesses, nonprofits, and educational organizations — sent a letter to President Biden seeking the creation of a “new agency task force to address retirement security.”

Possible outcomes, Fichtner said, include either raising payroll taxes, lowering benefits, or a combination of the two, but stressed that time is of the essence. 

“We’ve only got about 10 years to do it," he said, noting that isn’t a long time for mitigating bipartisan issues. “We need to find ways to encourage greater access and accumulation of emergency savings and more savings for a house, education, and ultimately retirement."

Stephanie is a reporter for Yahoo Money

Happy Investing

Source: Yahoomoney.com