How Many Legs Does Your Retirement Stool Have?Submitted by The Participant Effect on March 2nd, 2020
The three-legged stool is a metaphor that retirement planners use to describe the three most common sources of income for retirees. At one point in time, the three legs referred to Social Security, pension and personal savings — the multiple sources of income generally needed to achieve a financially secure retirement. More recently, however, fewer and fewer companies have offered pensions, replacing them with deferred contribution plans — the most common of which is a 401(k) plan.
Personal savings rates have rebounded since a low of 2.5% in 2005, right before the Great Recession, which was the lowest since 1938 following the Great Depression. By the end 0f 2019, it stood at 7.6%. Today, however, too many families still struggle to save money with the rising costs of living, healthcare and higher education.
Social Security is also a concern for many Americans as they wonder whether this program will be sustainable with rising deficits in the federal budget. It’s important not to panic, however, as there is considerable political pressure for lawmakers to solve this important problem.
You have more control when it comes to the 401(k) leg of your stool — and potentially significant advantages compared to putting money into personal savings. With a traditional 401(k), your contributions are made with pretax dollars and earnings grow tax free until retirement.
Additionally, many employers offer a company match, where they’ll match your contributions up to a certain percentage and a certain amount. The precise formula used to determine the match varies by employer. A company match is like earning free money, which is why it’s critically important to try to at least contribute enough to your 401(k) to earn the maximum company match that your employer offers.
Faced with rising costs and the burden of consumer debt, many families struggle to contribute to their retirement savings enough to achieve a comfortable retirement — leaving many with a “wobbly” stool.
Luckily, there are a number of things you can do to help get your stool on more solid ground. If you’re over 50, then you’re eligible to make catch-up contributions to your 401(k). According to the IRS, Individuals who are age 50 or over at the end of the calendar year are eligible to make annual catch-up contributions. Annual catch-up contributions up to $6,500 in 2020 ($6,000 in 2015 - 2019) may be permitted by these plans:
- 401(k) (other than a SIMPLE 401(k))
- governmental 457(b)”
If you’ve already maxed out allowable contributions for your 401(k), You can also set up an IRA and make catch-up contributions to that retirement account as well if you meet the age requirement.
And, although it may sound counterintuitive, it may make sense to delay filing for Social Security benefits. This is because filing early leads to a reduction in monthly benefits, while delaying will increase your monthly payments.
According to the Social Security Administration, for those born between 1943 and 1954, 66 is considered full retirement age, the age at which you’ll receive 100% of your monthly benefit. However, by age 67, you'll get 108% of the monthly benefit, and by age 70, your benefit increases to 132%. Any monthly benefit increases stops after that, so there is no further advantage to delaying.
If you’re feeling a little “wobbly” on your retirement stool, it’s probably a good idea to schedule a meeting with your financial advisor in order to discuss your situation and come up with a plan to get back on track.