The ‘Three-Legged Stool’ of Retirement
Many have referred to a strategy of investing called the ‘Three Legged Stool’ which refers to the sources of funding you’ll be able to draw upon once when you retire.
We think each of these ‘legs’ will become stressed in the future and should be analyzed now:
- Social Security
- Employee Sponsored Plan
- Personal Savings or Personal Plan
1- Social Security
2033. That is the year many predict social security will go insolvent. If the current policy of reallocating money from the main Social Security fund to the Disability fund continues, that deadline could come even sooner, by 2030 according to some accounts. Some consider this a credible warning and others dismiss it is fear mongering. No matter where you stand on the discussion, there are things you should understand when planning your retirement and counting on your Social Security checks. Regardless, the average monthly Social Security check is a modest $1,265. Making matters worse, a New York Times article revealed that less than half of households aged 55-64 have any retirement savings.* That’s a frightening statistic that shows the dependence Americans have on this teetering support system.
Lets not forget that the main funding for Social Security comes through employment taxes (FICA) and the demographics are not in our favor. The working age population in the United States is about 60% currently but is expected to drop to just 54% over the next half a century or so. We’ve seen the problems that Japan has been facing in terms of poor demographics of an aging population and we must be prepared for a similar challenge ourselves. Expanding life expectancies, while wonderful, could strain financial conditions to the maximum.
2- Employer Sponsored Plans
Defined Contribution & Defined Benefits
There are two broad paths one can follow to get to retirement. One is to save and invest for retirement yourself by what you ‘contribute’ into some investments that will grow into a large nest egg to enjoy when you retire. This is called a defined contribution plan. Examples of defined contribution plans are the 401(k) and profit sharing plans.
Another route is called a defined benefit plan where your employer (often a public sector entity such as a government or municipality) promises a pre-determined payout (a ‘defined benefit’). The main example of this is a pension plan from your employer-either a public sector employer such as a corporation or a private sector employer such as a corporation. You can also include annuities in the defined benefit category, since some types provide a defined benefit at retirement.
There is a very important distinction between the two plans-who plan bears the investment risks and administration costs. Notice the difference between the two types of plans from an employers perspective. Defined contribution focuses on the first part of the process, the buying of an investment (contribution). The responsibility of achieving the ultimate goal, the growth of that retirement portfolio into an adequate nest egg, is on the worker. The other plan is the defined benefit where the focus is on the final part of the process, delivering the end benefit to a worker for all their years of service. Here, the responsibility for the future ‘benefit’ is on the employer. The worker is essentially absolved of the stress of the entire retirement planning process and can focus on the his or her work.
3- Individual Plans
Outside of employer sponsored programs are personal plans which anyone can open. The most common is the Individual Retirement Account or IRAs. They have skyrocketed in popularity because they offer tax-deferred benefits at distribution on the investment’s earnings in the account. There is also the option of a self-directed IRA where a participant can take advantage of alternative investment choices such as tax lien certificates, precious metals and raw land.
Each of these investment vehicles has its own benefits and risks and have been approached and created with little thought to any built-in protections. Most investors are told they won’t have enough for retirement due to living longer but little warning seems to be given to protecting the retirement assets you currently have.
If you’ve spent a career doing the right things and investing for retirement you might want to consider using inverse ETFs as part of a comprehensive hedging strategy. If you are worried about severe market disruptions, we offer information on how you can hedge each of these types of retirement accounts with inverse ETFs (and other bear market strategies) which accounts work best for hedging. Some of these products may be unsuitable or unavailable for use inside of a retirement account but may be available in a non-retirement account. You want your Golden Years to be golden not spent in stress and looking for employment.