You have probably have heard about the three-legged stool approach to retirement planning. Historically, financial planners have advised that retirees could expect to derive their retirement income from three sources: Social Security, corporate retirement plans and personal savings. 

It was generally understood that each source of funds was responsible for providing one-third of the total living expenses required in retirement. Over the years the three-legged stool approach has been modified for a number of reasons:

  • The disappearance of defined benefit pension plans (only 18% of workers currently have access to such a plan);
  • An increase in the age required to collect a full Social Security benefit;
  • The soaring costs of health care; and
  • The expectation that many pre-retirees may not reduce their standard of living when they retire. In other words, many workers are expecting 100% income replacement in retirement.

In order to meet the 100% income replacement requirement, experts estimate that 25% of retiree living expenses will need to come from corporate retirement plans, 25% from Social Security and 50% from personal savings. However, it is becoming evident that most baby boomers have not saved, and will not save,  nearly enough to fund the retirement they expect. As a result, it may become necessary to add a fourth leg to the stool: part-time employment in retirement. This new approach assumes that income will flow in 25% increments from each source.

Surprisingly, nearly 75% of pre-retirees over the age of 50 in a recent study say they have a desire to work while retired. This is probably a good thing, since most will have to. Lack of corporate retiree health care, lifestyle expectations and a much lower savings rate than required will force most baby boomers to continue working.

Robert C. Lawton, AIF, CRPS is President of Lawton Retirement Plan Consultants, LLC, an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.

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