For decades, many retirement planning guides have talked about the three-legged stool of retirement: Social Security, private savings and pensions.
The analogy of a stool for retirement with three legs is no longer the case for many, if not most, American workers, according to the article “New ‘4-Legged Stool’ Can Mend Broken Retirements” from Newsmax. Between concerns about Social Security’s future, the dearth of pensions at most companies and retirement savings hurt by past market crashes have all combined to take a toll.
What’s the answer?
Let’s scrap the three-legged stool for a four-legged chair. With four legs, if you lose one leg, there are still three holding things up. Here’s how to build a four-legged chair for retirement:
Income. This is the smallest leg on the chair, and in this case, is not income from your retirement accounts. It’s not pension income either. In this case, the income is a small stream of income during retirement. Maybe you’re a greeter at a store, or a part-time consultant to people you worked with throughout your career. Perhaps you do what a lot of retirees do, start a business, selling on eBay or Esty. Whatever it is, a job that brings in a few thousand dollars a year can make a difference in your retirement stability.
Social Security. Social Security may not be going away completely, but it is possible that the amount of benefits will be reduced. The trust fund will be exhausted in 2034, there are some big demographic shifts now underway with more millennials in the workplace than boomers and depending on your point of view, the changes to Social Security may be big, little, or none at all. Expect something to change. That’s why the small part time job that brings in a little bit of income could be a retirement-saver.
Non-Tax Advantaged Accounts. Retirees need liquidity in retirement. If you have lots of money in your IRA, 401(k), or SEP accounts, that’s great. However, that money may not be immediately available and there are tax consequences to selling those assets that can do damage, if you withdraw too much in any given year.
It is better instead to have a mixture of demand and investment accounts, including checking accounts, savings accounts, money market and mutual fund accounts. Checking and saving accounts are the most immediately liquid, while money market and mutual fund accounts are less liquid. They could result in a taxable event, if assets are liquidated. The benefit of having money in a taxable investment account, is that you can take that money out with no limitations. If you are taking money from a 401(k) or an IRA before age 59½, you’ll get hit with taxes and possibly penalties. Yes, you may have to pay capital gains taxes on your earnings, but at least those funds are readily available to you, if you need them.
Tax-Advantaged Retirement Accounts. These accounts have become the mainstay of most people’s retirement funds. Investment choices are limited for most people, since they are determined by the company handing the accounts for your employer. However, many plans offer benefits, like matching contributions. This is free money, and it is always recommended to do whatever you can to take advantage of any employer matching plans. It lets you make more gains than you would just from your own savings efforts.
These accounts come with strings. You can’t touch them until you are close to retirement age, but there are benefits. If they’re not performing, you can make changes within the restrictions of the investment company. While it’s not easy to figure out what the market is going to do next, with the help of representatives from the companies running the retirement portfolio, you can make informed decisions.
As long as you exercise financial discipline, don’t put all of your retirement nest eggs into one basket and make sure you have four legs on your retirement stool, you’ll be well-prepared to enjoy your retirement.
Reference: News Max (April 11, 2019) “New ‘4-Legged Stool’ Can Mend Broken Retirements”
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