Among retirement planning circles there has been this idea of how you are supposed to fund your retirement called the 3 legged stool. This stool is a representation of your post retirement life and the funding sources that support it.
In financial planning circles the seat of the stool is supported by,
Now for the sake of this post we need to break pensions into its two parts which are defined benefits and defined contributions.
A defined benefit is where your employer does all the saving for you and when you retire you get a check every month until you die. It puts all the onus of your retirement on the company.
A defined compensation plan is otherwise known as the 401K. This type of plan puts all the responsibility on you and the company may or may not chip in some money in addition to what you put in.
Now most people you see out and about if they have a job and that job contributes towards a pension it is most likely going to be a defined compensation/401k pension. This means that most people are 100% responsible for saving for their retirement and we have discovered in the last few decades since the 401k system became dominant that people in general are not good at this.
I know it's shocking…. Or not really.
Humans in general are terrible at looking into the future and thinking about what our current actions will do to affect that future. You don’t look at that new car you want to buy and think to yourself well buying this car means I will have to work 3 years longer before I can retire. That thought will never cross the minds of most people and that is one of the biggest reasons why people fail at retirement saving.
The False Leg that is the Pension
So getting back to the analogy of the three legged stool and what I believe to be the false promise of pensions. Before the 401k became the de facto saving vehicle if you had a retirement plan through your work it was a defined benefit plan. These plans were much better in general for workers because they took the individual out of it. Everyone that worked for the company contributed and everyone got a slice of that pie when it came due to them. These companies either by themselves or as a collective had the resources to make sure that money was managed as effectively as it could be. You as an individual will never have the time or expertise to manage that money as effectively as a company could.
So when we went from an institutional system of companies saving on behalf of their employees to employees saving on their own behalf by themselves. This change had an obvious upside for the companies in that it eliminated a large financial burden and risk from their ledgers and transferred it all to employees. What this has led to is a generation or two of workers that have no real retirement savings and will be entirely reliant on Social Security and winning the lottery to fund their retirement.
What that stool really looked like.
Unless you are one of the few that have a true defined benefit pension or you have the means and discipline to save substantial sums you will most likely fall short of the retirement you want. But despite the obvious failure of the 401k system many if not most of the financial advisers will still perpetuate the myth of 3 legged stool.
At best that stool is two and half legs with the leg representing the pension coming up short. This leaves potential retirees either balancing precariously on the other two legs (savings and Social Security) or accepting a less than ideal retirement.
What to do about it
Without a major change to the retirement laws and framework in this country there is not much you can do to change how the current system will affect you. The best you can do is make the system as it is work the best it can for you. You do this by finding out what kind of plan you have assuming you do have one and find out what it will take to maximize its effectiveness. After that, put as much as you can without making yourself miserable into low cost after tax investments. The responsibility of saving for your future is all on you and as much as that sucks it just the way it is right now.
Hello my name is Josh Larson and I am the creator of the Green Living Library. Here on the blog you will find updates to content found in the Green Living Library as well as stories from those living the sustainable life already.