The traditional three-legged stool model of retirement, which consists of Social Security benefits, pensions, and personal savings, is collapsing, and individuals need to plug the gap with increased savings. According to Vanguard, the magic number to maximize security is a total savings of at least 12% of income, including employer contributions.
History Of The Three-Legged Stool Model
When Social Security was first created, it was meant to be part of a three-legged stool that supported older Americans in retirement. Social Security benefits were one leg, a pension was another, and savings were the third. However, Social Security benefits are designed to replace just 40% of pre-retirement income, and pensions are no longer a real source of support for many Americans, with only 18% of workers having access to one.
The Numbers
The traditional rule of thumb recommends that Americans save 10% of their income, but experts now recommend a different approach. Vanguard’s “How America Retires” report suggests that total savings of at least 12% can help position most participants for a successful retirement. This shift from 10% to at least 12% of income may be based on two big factors: longer life spans and lower projections for future returns.
Actionable Strategies
To close the gap left by the weakening three-legged stool model, individuals can take several steps. First, they can increase their contributions to retirement accounts, such as 401(k), 403(b), or most governmental 457(b) plans. In 2026, employees can contribute up to $24,500 to these plans, and individuals age 50 and older may qualify for an additional $8,000 catch-up contribution. Additionally, individuals can review their investments and risk exposure, and consider dividing their retirement assets into three buckets: short-term funds for immediate expenses, intermediate-term investments for spending needs over the next several years, and long-term investments designed to provide growth potential and help offset inflation.
Shifting Focus To Sustainable Retirement Income
As retirement approaches, the focus should gradually shift from accumulating wealth to preparing savings to provide income throughout retirement. This can be achieved by estimating monthly expenses, identifying anticipated income sources, and creating a sustainable retirement income strategy. According to Ohan Kayikchyan, founder of Alohana Financial, maintaining enough liquidity is crucial to building a sustainable retirement strategy. By prioritizing protection and growth, individuals can reduce the need to sell long-term investments during periods of market volatility.
Conclusion
In conclusion, the traditional three-legged stool model of retirement is collapsing, and individuals need to plug the gap with increased savings. By understanding the history of the model, the numbers, and actionable strategies, individuals can take control of their retirement savings and create a sustainable income stream. As Warren Buffett’s rule suggests, being greedy when others are fearful can be a successful strategy, but it’s essential to have a long-term perspective and a well-diversified portfolio. With the right approach, individuals can ensure a secure and comfortable retirement, and as always, it’s best to talk to your doctor or financial advisor for personalized advice.
Sources
- US retirement’s ‘3-legged stool’ model is collapsing, and your savings need to plug the gap. Do you have enough?
- Pension
- New data shows retirement savers are rethinking what 'safe' means
- 5 Financial Moves to Make in the Five Years Before Retirement
- Your Retirement Savings Are Fueling the AI Bubble
- The Stock Market Just Had Its Worst Day in 19 Months. Here's Warren Buffett's Rule for a 65-Year-Old With $800,000 in Retirement Savings.
Photo: U.S. Navy photo by Photographer’s Mate Airman Alex Stanislawski. (Public domain)
