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April 21, 2022
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August 1, 2022In financial planning for retirement, there is a metaphor called the three-legged stool. Each leg of the stool represents a source of income for a retiree, and these three sources produce the income you will have when you're no longer in the workforce.
And just as a three-legged stool needs all three legs for it to serve as a stool, you need all three income sources in order for your retirement to work. The first leg is Social Security, the second is a pension or an employee contribution retirement account, and the third is personal savings. There is a fourth item, investments, but varies from person to person as it requires more risk and knowledge than the other three. Nonetheless you need to consider the problems with each of these parts:
- You are unlikely to know how much, if any, you will collect from the Social Security program. It's determined by lifetime earnings, and you can't look into the future and foretell how much money you're going to make in your life.
- You are also unlikely to know how your employer will manage your retirement contribution fund (like a 401-K or IRA). In fact, you don't even know if the company you work for will have one.
- Finally, you probably haven't spent a lot of time thinking about retirement because you’re still in school. And there's certainly no way that you can know if anything will happen before age 65 that will require you to spend your savings.
It sounds like it's impossible to save for retirement! Wrong. Just like anything else in life, you won't get anywhere unless you set your sights on a goal, pursue it and understand that it will take time for it to grow and flourish.
