The original plan for retirees was to have three parts: Social Security, a pension, and
savings. You would draw on these during your retirement. SS was to be about 40%, the
pension about 40%, and savings would fill in as needed. The goal was to replace about
75% of your pre-retirement income amount. Counselors drew on the analogy of a three-
legged stool, which was fine for the 1960s.
Life intervened, and pension plans were hit hard by inflation in the 1970s and 80s. In
response, the IRS created defined contribution plans, including IRA’s like the 401(k).
This was adopted by businesses trying to cut retirement benefits for regular employees
and expand them for the upper echelon. The strategy stayed the same, so the tactics
didn’t change much. Fifty years later, a rather lopsided situation resulted, with two of the
three stool legs foreshortened.
Here’s the Standard Formula from the 1990s:
- Work at a job that pays into Social Security (i.e., not farming or domestic work).
- If the job has a 401(k) or similar plan, invest some of your income and get
additional matching income. - Have an IRA to shelter some pre-tax income.
- Plan to save an additional 10% of income in long-term investments (stocks,
annuities, etc.).
Then, two problems showed the weakness of this plan: the Dot-Com bust in 2000 and
the global financial crisis in 2008. Mainstream economists had all sorts of valid and
bogus explanations, but none predicted either event.
On top of that, worker pay has been stagnant as employers held wages low and
expanded profits. Shareholder value was dubbed king, and workers were given short
shrift. How could we adjust our planning for retirement?
What if your career didn’t follow the Standard Formula, as in my case? Well, you may have some challenges. The best news is that all is not lost. You will need to do some adjusting of your expenses and your savings. If you are still working, you have more options.
Here are some alternative scenarios:
- You have little savings (<$100,000), but your SS benefit is high (>$3,500/mo.). You may also have a small pension or annuity of less than $1,000/mo.
- You have a large house that you want to sell and then buy a condo so that maintenance isn’t such a problem. You will use some of the cash to partly fund your retirement.
- You are still young and have an okay plan but want to improve it, since you don’t know what will happen with Social Security and your savings. You want to build a plan with more income streams to help you while your savings are building.
