Saving for Retirement: The Three-Legged Stool Approach
Financial planners often refer to the “three-legged stool” in describing the most common sources of income during retirement. Traditionally, the three legs are Social Security benefits, a defined benefit (DB) pension plan, and supplemental individual savings like a defined contribution (DC) plan.
Today many workers currently lack access to all three legs, as roughly 78 million American workers (both public and private) don’t have access to a retirement plan at work. However, City of Austin employees have access to all three, and the “three-legged stool” approach provides an opportunity to achieve financial security in retirement.
The first leg, Social Security, provides guaranteed, cost-of-living adjusted income for life and is the foundation of most Americans’ retirement. However, it was never meant to be the single source of income in retirement.
The second leg, a defined benefit plan such as your COAERS pension, will provide a guaranteed monthly income stream for your life, and its unique features make it a good value for the money. The pooled nature of it, where the pension contributions from members are put together in the same pot and the assets are managed professionally, can help achieve “economies of scale” - getting you to a target benefit at about half the cost. Pensions also typically provide other important benefits such as disability protection and survivor benefits.
The final leg of the stool is individual savings. There are many ways to save for retirement, such as saving through a defined contribution (DC) plan. The City of Austin offers employees the opportunity to participate in a deferred compensation plan. You can find out more about the City’s deferred compensation plan here: www.dcaustin.com
It’s important to keep in mind all three of these income streams in planning for your financial security in retirement, and it’s never too late to start!
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