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

·3 min read

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.

Retired Maria Elena Rodriguez sits with her husband, Miguel Meza Sanchez, center, and their son, Miguel Rodriguez, 65, right, in Edinburg, Texas. (Carolyn Cole/Los Angeles Times via Getty Images)
Retired Maria Elena Rodriguez sits with her husband, Miguel Meza Sanchez, and their son, Miguel Rodriguez, right, in Edinburg, Texas. (Carolyn Cole/Los Angeles Times via Getty Images)

'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. 

Read more: 3 surprising facts about Social Security

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. 

A woman wears a face mask as an elderly couple walk on a street in Alhambra, California on February 4, 2020. - As the coronavirus outbreak  spreads, fueling rumors and misinformation, a petition to cancel all classes in one US school district for fear of the virus has garnered nearly 14,000 signatures. The online petition posted on urges the Alhambra Unified School District located east of Los Angeles and with a heavily Asian population, to basically shut down until the outbreak is over. School district officials, however, have dismissed the petition as a bid to whip up hysteria over the deadly outbreak that has killed hundreds in China. (Photo by Frederic J. BROWN / AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)
A woman wears a face mask as an elderly couple walk on a street in Alhambra, Calif. on February 4, 2020. (Photo by Frederic J. BROWN/AFP)

"It's very shaky," Fichtner said, "and that three-legged stool sometimes looks like a pogo stick as opposed to a three-legged stool, so we're trying to have a better discussion around what does that mean now." 

Read more: 3 key factors to consider when planning for retirement

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.”

Yahoo Money sister site Cashay has a weekly newsletter.
Yahoo Money sister site Cashay has a weekly newsletter.

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 and Cashay, a new personal finance website. Follow her on Twitter @SJAsymkos.

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