Source: Employee Benefit News
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.