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April 06, 2005 at 08:00 PM
Fixing the 3-legged retirement income stool for tomorrows seniors
By Kirsten L. Falk
For years, the conventional wisdom about retirement income was that it could be compared to a 3-legged stool: the first leg was a pension or employer-sponsored retirement program; the second leg was Social Security benefits; and the third leg was the individuals personal savings.
Because the United States has one of the lowest personal savings rates in the world, planners in the past have focused on warning those approaching retirement of the danger of a 2-legged “retirement income” stooli.e., entering retirement without having the third leg of personal savings.
In the current political and economic environment where politicians are planning sweeping changes to the second leg, even to the point of declaring that there is no trust fund for Social Security, seniors may find that if they are to have a 3-legged stool, they may have to provide 2 of the legs themselves.
In all probability, future retirees will continue to receive Social Security benefits of some sort. In fact, many of the proposed plans would not affect the benefits of those who are already retired or are currently 55 or older.
However, for those under 55, there is increased likelihood that benefits will be reduced. That is very bad news as a large number of currently retired Americans derive a significant percentage of their income from Social Security payments. Because so many of those who have not yet retired have inadequate personal savings, a reduction in Social Security benefits would be devastating.
With such a bleak outlook for future retirees, is there any way to prevent a scenario that has seniors flipping burgers at a fast food restaurant when theyre 80 years old? Is there anything that advisors can do to help their clients construct a more stable retirement income stool?
The answer is emphatically “yes.” It truly is never too late to improve the prospects for a clients future retirement.
If the amount of the clients current accumulated retirement savings is not substantial, that future may not include cruises around the world or a second home in Aspen. However, anything that advisors can do to help clients maximize current savings will result in a more comfortable retirement.
Perhaps the first thing advisors can focus on is the clients current spending habits. Many people will protest that they cant afford to save more because they dont have anything left after paying the bills.
Although it may be true that some people have nothing left to save, in most cases, clients have expenses that they could reduce to earmark more for savings.
For instance: Are they currently paying for services they dont really use like premium cable TV channels or a flat monthly fee for unlimited long distance on a traditional phone line? Many people sign up for such services, only to find themselves watching very little on the premium channels or using their free cell phone long distance minutes instead of the traditional phone service.
Dropping the premium cable TV channels could save $10 to $20 a month, while dropping flat fee long distance could save another $20 or so. Thats a potential maximum savings of almost $500 a year without sacrificing a thing.
A few other savings could be realized by using free services, such as getting best-selling books or movies from the library, instead of buying or renting them. Not purchasing one hardback book a month would save roughly $250 a year, while not renting one movie a week would save another $250 or so.
