Business commentary by Carol Perry: The three-legged stool is becoming extinct
For the Nevada Appeal
Even though the past few weeks were chock full of geopolitical events, in the long run, do they actually make a difference on your retirement portfolio?
Geopolitical events cause “pops and drops” in the market, but unless they actually impact earnings over time, they are not relevant to long term planning. So many things can have an impact on your savings that I thought it might be a good time to share a basic retirement planning concept, the three-legged stool. This is an analogy for the three primary sources of retirement income the average American relies on after they get that proverbial gold watch.
The first leg of the stool is entitlement programs such as Social Security and Medicare. The second and quickly becoming extinct is the pension plan. The third and fast becoming the primary vehicle for retirement is the 401K plan. In the 20th Century, many Americans could feel comfortable in knowing that they would indeed receive promised benefits from all three legs, but things are changing in the 21st century. If you are currently working and saving for retirement, you had better pay attention to these changes.
First, I feel you should prepare yourself for sweeping changes in entitlements. Politicians may tell you that these sacred cows will not be touched and you will receive what you were promised on your annual benefits statement when you retire. If you are younger than 55, you should prepare yourself to accept less in benefits and pay more for Medicare in addition to a delayed retirement date. During the peak earning years of the baby boom, more money was being collected in FICA tax than benefits being paid to existing retirees, but instead of leaving that money in the trust funds to be used to fund the boomer retirees, it was used for other government programs and replaced with treasury IOUs.
Now that the boomers are reaching the age when they can collect benefits from entitlements, there is nothing in those trust funds to pay benefits. Further complicating the problem, the generations behind the boom are much smaller and cannot support such a huge glut of retirees via FICA taxes alone. For example, by the time I reach age 65, there will only be approximately 1.7 workers to each retiree. That would be a crushing tax load for workers, so entitlement programs must make changes now to accommodate the boomers. But will Congress really make such unpopular changes in time to save entitlements? Saw that leg off and now you have a wobbly two-legged stool.
Leg two is the pension plan. I say this is becoming extinct because both public and private employers can no longer afford to fund these plans and make a profit for their shareholders. When pensions were originally put in place, people did not live as long as they do now. We see people living 30-40 years in retirement today. This can often surpass the time spent employed and makes pensions less desirable for employers.
Many public pension plans are now underfunded. That means that the plan does not have sufficient assets to pay promised benefits. Because of poor performance of the pension funds and huge volatility in the markets, many pensions have no way to meet obligations without decreasing or eliminating benefits to new workers. The pension plan leg is on, pardon my pun, it’s last leg and will soon be a dinosaur. Saw off leg two and now you are precariously sitting on a one-legged stool.
The last leg and the one most employees pay the least attention to is the 401K plan. This plan puts much more if not all of the burden of retirement savings on the employees themselves. Whether you think it is fair or not, 401K is the future and since it is the only leg you have left, you had better make it as strong as a tree trunk. 401K plans are fraught with pitfalls and hidden costs that can destroy your planned retirement. The average employee gets a packet with all kinds of mumbojumbo in a booklet. Then they are told to choose.
Choose how much to withhold, choose your investments, choose , choose, choose but no one tells you a thing about what you are choosing or why. As a financial planner, I felt proper 401K plan asset allocation was a vital part of a client’s future and something that should not be ignored so I would assist my clients with their choices. But many employees have no access or cannot afford a financial planner. Most employers do not provide advice with their plans and the employee has to fend for themselves. When these folks would come in to see me in the late 40s or early 50s they often had not withheld enough money for retirement or left all assets in a fixed account thinking it would be safe.
Nothing could have been farther from the truth.
So the three-legged stool, while not entirely a thing of the past, is becoming rare. My advice is to be prepared to fund most if not all of your own retirement and you will have much less to worry about in those golden years.
• Carol Perry has been a Northern Nevada resident since 1983. You can reach her at firstname.lastname@example.org.