One of the first lessons I learned as a new financial planner was the concept of the “three-legged stool.” Now, this was the very first time I had ever heard of this piece of furniture and I was thrilled to know that I had one. I took great interest as my instructor discussed how the stool represented the three financial streams that would fund my retirement: social security, employer pensions and personal savings. He described it so eloquently that I found myself chanting “a financially secure retirement comprises what your employer does for you, what your government does for you, and what you do for yourself.” After a few moments, I realized that at least one of my three legs was missing. Oops!
If you read my previous article, you know that prior to becoming a financial planner, I worked in the nonprofit sector and changed careers when I realized that I wouldn’t have enough to retire at my desired retirement age. It wasn’t until I took a closer look at my three-legged stool that I understood just how wobbly my retirement would be if I didn’t act…and fast.
The truth is, the three-legged stool has changed. Fewer employers are offering defined benefit plans and the 2008 annual report issued by the Social Security Administration estimate that our “Uncle Sam” (the Social Security trust fund) will be broke by 2041 if we stay on the current track. I recently read a synopsis of a book, “We’re not in Kansas Anymore” written in 2004 (seems like so long ago) by Walter Updegrave, that sums up the reality that most of us face: the days when we could rely on corporate benevolence and government largesse to support us in our Golden Years are gone. Unfortunately, many of us are not really clear about the “new three-legged stool” and what we need to do to prepare for retirement properly.
We all have to start where we are and, because financial planners love lists, I offer a checklist to help you identify (or build) your stool.
Start saving now – yes now…today, even. Now, you may already be doing this and, if so, keep it up. If you haven’t started yet and think it is too late to catch up, start anyway. You will have to do a bit of math to figure out how much you need to save but don’t wait until you have done that to start squirreling away some savings. Every little bit helps so even if you are saving a small amount develop a habit of putting some money away for your long term financial security.
Set a target date; but don’t take yourself too seriously – this is called your “time horizon” and it lets you know how long you have before you need the money; it is the foundation for choosing the right investment vehicle. This is also a wonderful opportunity to figure out a “Plan B” in case you (like me) don’t think you can meet the target. Your “Plan B” may include working longer (a great option if you love what you do), a career change or self-employment.
Gather your current information – retirement statements (from all of your previous jobs, too) and your social security statements that come each year around your birthday. While you’ve got it handy, put all that stuff in one binder so you can keep track of it; after all, you will be referring to it as you build your stool. Remember that your social security statement uses projections based on specific assumptions, so read it carefully – not just the “estimated” benefit amounts. If you have misplaced your statement you can request one here.
Do the math – a visit to a couple of the financial education websites can help you create a baseline “number” to project your retirement goals and the amount you need to save each month to reach your targets. Check out a retirement calculator or the FPA Financial Roadmap to help you get started.
Get the information you need – managing multiple, and sometimes competing, financial priorities can be challenging. When you consider your retirement goals you may have many different issues to consider. One of my very favorite websites has some wonderful retirement guidelines that I think you will find helpful.
While it is certainly true that the earlier you begin preparing for retirement the more likely you will be to build an adequate nest egg, it is never too late to start creating or building your own three-legged stool.
President & CEO
Sage Financial Solutions
San Francisco, CA