Income Stool Theory
For years, financial experts used the analogy of a stool to demonstrate the primary sources that provide retirement income. However, gone are the days when you can count on a pension from your employer. Plus, Social Security doesn’t seem so “secure” anymore. Altogether, the legs of the stool used to represent a stable source of income, but not anymore. Simply put, it’s up to you to fund your retirement!
✳️ Business Income - The least popular leg of retirement income is business income. The majority of retirees either don't have a business that can provide them income without working or they have sold their business to begin their retirement journey.
✳️ Personal Savings - The most important part of personal savings is how it is used to generate your income. For example, $1 million with a 5% rate of return could generate $50,000 per year without touching the principal balance. There are many other options including real estate, annuities, businesses, etc. The key is planning to adequately have enough in personal savings to produce the income needed.
As you begin building your income stool, keep in mind that if you have none of the other legs (social security or pensions) to support you, your personal savings is the ONLY thing you will have to rely on in retirement.
Something to think about: how sturdy is a one-legged stool? That leg better be pretty solid - AKA - you better have a fat stack of cash in savings by retirement if you don’t want to go back to work again.
*According to the National Institute on Retirement Security, “almost 40 million households have no retirement savings at all. Taking them and people who aren’t saving enough into account, the Employee Benefit Research Institute estimates that Americans have a retirement savings deficit at $4.3 trillion. That means all U.S. households (with a head of household between the ages of 25 and 64) have a total $4.3 trillion less in savings than they should have for retirement.”*
Research by the Federal Reserve found that the median retirement account balance in the U.S. – looking only at those who have retirement accounts – was just $60,000 in 2016. How far do you think $60,000 will get you when you’re retired? One year? MAYBE two?
✳️ Pensions - If you're one of the lucky few in the world who still have the ability to receive a pension when you retire, that allows you to begin construction of your income stool with guaranteed income. However, be aware that pensions can be bought-out, so remember that the guarantee is only as strong as the company backing it.
Most pensions are for a set amount and don't have cost of living adjustments factored in, so they can play a small role in your total income. As of 2018, only 17% of all private-sector workers have access to a traditional pension plan, and the number of employers providing pensions continues to decline every year.
✳️ Social Security - We would all like to believe that the social security system that currently helps our parents and grandparents will be around in the same capacity for us. However, if you are building an income stool for you and/or your family, and the social security leg is barely there or non-existent, how stable is it?
*As of 2017, SSA data shows that 61% of retired workers counts on their benefits to comprise at least half of their monthly income. This includes a whopping 71% of unmarried elderly individuals, and 48% of married elderly adults.*
Our advice: Don’t count on social security to be your retirement parachute as a result of a lack of planning. Start planning for retirement NOW, and if you do receive social security when you retire, consider it a bonus.
#firemovement #fire #millionaire #retire #retirement #finance #indexfunds #wealth #rich #money #invest #frugal #frugalliving #frugallife #finances #moneyexpert #buildwealth #inspiration #financialsuccess #financialfreedom #incomestooltheory #socialsecurity #retirementplanning