© 2020 by Michael A. Babiarz
The original concept of post-World War II retirement planning used a three-legged stool as a common metaphor. Some have attributed this analogy to Franklin Roosevelt; Others believe it was a late 1940s illustration by an executive of a large insurance company. There doesn’t seem to be any definitive proof of its origin.
The three-legged stool was one part Social Security, one part after-tax savings, and one part pension. Over the years, the pension segment has been largely replaced by 401(k) plans or SEP or simple IRAs. Currently, less than 20% of Fortune 500 companies offer traditional pensions. These are even less common in smaller companies. You might still find pensions at government or union jobs. But the good news is that at least 75% of companies will offer some form of retirement savings plan and many companies will contribute matching amounts.
Another issue that affects the three-legged stool is the fact that less Americans are working at a traditional W-2 job. Statistically, we are reaching the point where more than half of us will no longer be employees. Instead, Americans will be working as contract workers or solo entrepreneurs. This makes the individual even more responsible for his or her retirement savings. When we look at retirement savings, our first leg, the figures are pretty grim.
The average American aged 60 to 64 has about $229,000 in tax-deferred accounts. And we if add private savings, our second leg of our stool to that, the number climbs to almost $550,000.
But here’s where it gets tricky. Let’s look at the average figures and compare them to the median numbers:
Tax-deferred: average amount = $229,000; median amount = $16,000
Total with private savings: average amount = $550,000; median amount = $39,000.
We need to pay more attention to the median figure as it is the more important one to note. Remember median means equal numbers of persons below and above that number. The disparity between the average and the median is quite large. This means that there are a few persons doing quite well whose large numbers pull up the average significantly. This jives with the overall trend towards greater income disparity in the US over the past 40 years.
Moreover, there are a lot of worries about Social Security, our third leg of the stool, dropping or disappearing. While it is true that without changing the amount contributed, the ceiling on contributions, or the retirement age, we are coming upon a shortfall where the Social Security trust fund plus contributions from workers will not be enough to cover the output. This is estimated to occur in 2034. But it is a myth that Social Security will suddenly go broke on one particular day. The shortfall is simply lines crossing on a graph and, actuarially, it is an easy fix although a politically difficult one. One proposal lifts the cap on social security earnings from $132,900. Another gradually raises the retirement age further, now set to fully vest at 67, to age 70. Still others call for increasing the payroll tax another 2% from 12.4% to 14.4%. This tax is split between employer and employee, although entrepreneurs and contract workers would pay the full amount. Any one of these, or some combination of lesser fixes, can cure the problem. If the problem isn’t cured, benefits would have to be cut. But the benefit won’t go away.
Sadly, the average American retiree relies on social security for about half of his or her retirement income. This is not what the three-legged stool envisioned. If the legs aren’t approximately equal, won’t the stool tip over?
In the midst of this, Americans are saving less. Most of us don’t even have enough savings to cover a small emergency, much less tucking away after-tax monies towards our golden years. So it would seem as if that private savings leg of the stool is somewhat weakened as well. According to the US Government, 39% of all Americans have NO private savings whatsoever. Only 25% have saved more than $10,000.
So are you average? Are you above or below the mean? The scary truth is that the vast majority of us, or the typical American if you will, are woefully unprepared for the day when we leave our primary job.
Sources:
Average Retirement Savings by Age: Averages, Medians and Percentiles, DQYDJ, retrieved on January 27, 2020 from https://dqydj.com/retirement-savings-by-age-united-states/
The Three-Legged Stool of Retirement Planning, The Balance, retrieved on January 27, 2020 from https://www.thebalance.com/three-legged-stool-of-retirement-2894310
Social Security Funded Until 2034, and About Three-Quarters Funded for the Long Term; Many Options to Address the Long-Term Shortfall, Posted on June 22, 2016 by Carolyn Colvin, Acting Commissioner of Social Security, retrieved on January 27, 2020 from https://blog.ssa.gov/social-security-funded-until-2034-and-about-three-quarters-funded-for-the-long-term-many-options-to-address-the-long-term-shortfall/