Explaining the 3-Legged Stool of Retirement

By Becca Stanek · March 20, 2023 · 8 minute read

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Explaining the 3-Legged Stool of Retirement

The three-legged stool of retirement was a previously popular model for retirement that refers to a worker’s three sources of income during their golden years: Social Security, employee pensions, and personal savings, such as in a 401(k). Each of the individual legs is important on its own, and together they create a multi-faceted but unified plan for long-term financial saving and investing.

Unfortunately, the three-legged stool model has declined in popularity over the past several decades. This is largely because employee pensions are disappearing, but also because the future payout rates of the Social Security program are not totally known.

This leaves the three-legged stool model with just one strong leg, which happens to be personal savings — meaning saving might be more important now than ever before.

The Three Legs of the Three-Legged Stool

Saving for retirement is no small job. Think about it: You’re saving up to live for likely 20 years or more with no income from a traditional salary. An appropriate response to such a big undertaking could be to tackle the job from multiple angles.

Enter the three-legged stool, an approach to retirement income that considers multiple sources. Here’s an overview of each of the different legs in the model.

Personal Savings

Personal savings refers to any money you’ve saved on your own for use in retirement. This could be money saved in a savings account at a commercial bank or online financial services company, held and invested within a brokerage account, or stashed in an account specifically designed for retirement, like a 401(k) or Roth IRA.

For those looking to beef up their retirement savings, accounts specifically designed for retirement could be a good bet. That’s because retirement accounts generally have preferential tax treatment compared to savings or non-qualified brokerage accounts. Though, of course, you might want to check with a tax professional for the best plan of attack given your tax situation.

Some retirement accounts are offered through an employer, such as a 401(k), 403(b), or Thrift Savings Plan. Generally, contributions are taken from your paycheck and deposited into the account. Workplace retirement plans may have the added benefit of a match program. This would mean that when you contribute to your account, your employer may match that amount fully or partially.

In addition to a retirement account at work, you can open a retirement account on your own, such as a traditional or Roth IRA. Self-employed folks might look to open up a SEP IRA or Solo 401(k). You can open any of these accounts at a financial services company of your choosing, and it would be up to you to fund it. You could do this through intermittent contributions throughout the year, but you may find it helpful to set up an automatic contribution each month to mimic a workplace retirement plan.

It’s also possible to open savings accounts beyond your retirement accounts. If you’ve maxed out what the IRS allows you to put into a retirement account, or you do not qualify for or have access to one, that doesn’t mean you shouldn’t invest for the future. You could consider opening a brokerage account, which doesn’t offer the tax benefits of a retirement plan but does allow you to invest for the long-term.

Once the money is held within any sort of account, you may want to consider investing that money as well. This way, your money could grow over time, earning compound returns. Workplace retirement plans might have default options, such as target date funds or diversified mutual funds. With investing, two good rules of thumb are to make sure you know what types of investments your funds are invested in and to understand the fees that you’re paying on your investment options.

Recommended: What is a Brokerage Account?


Retirement plans offered through workplaces are also known as “defined contribution” plans — in other words, it’s up to the employee to contribute to them. Compare this to “defined benefit” plans, which are pension plans.

Pensions are retirement programs wherein the employer saves, invests, and disburses money on behalf of their employees. Basically, the company takes care of everything.

In retirement, employees would simply receive a monthly check. How much of a pension they would receive depends on how long they worked for the company, their position, and other variables.

However, pension plans are now exceedingly rare within corporate America. With the ushering in of defined contribution plans, such as 401(k) accounts, employers are largely leaving behind the pension model, for reasons such as pensions being expensive and difficult to manage. That leaves the onus on the employee.

That said, pension plans are not totally extinct. For example, teachers, firefighters, and other government workers may have pension plans. They may be more common for workers in the public sector than they are in the private sector.

But even then, some of these public pension plans are at risk due to underfunding. Employees with pension plans are still encouraged to put money toward their personal savings.

Social Security

Social Security is guaranteed lifetime income for workers who pay into the program each year via their FICA taxes. Both the employee and the employer pay into Social Security. While Social Security technically funds both retirement and disability benefits, for the sake of discussing sources of retirement income, this section refers to the benefits one would receive from Social Security upon reaching retirement age as determined by the program.

Social Security benefits can generally start being paid out between the ages of 62 and 70. You’ll have a full retirement age, depending on what year you were born. For every month before that age that you claim your benefit, it will be reduced. For every month later than that age you claim your benefit up to age 70, it will be increased. Therefore, it could be advantageous to delay Social Security, though that decision all depends on your family’s resources, as well as your age and health.

How much you’ll receive in Social Security generally depends on how much you pay into the system throughout your working career, though the monthly program currently caps the amount you can receive.

In addition to claiming Social Security based on your own earning history, you can be entitled to receive benefits based on your spouse. The portion of their benefit you’re entitled to depends on if they are alive or dead, so it is important to work with a financial planner before deciding the best Social Security strategy for your family.

As with private pensions through companies, the current Social Security benefits are not necessarily a sure bet for those saving for retirement. There is some risk that Social Security could become underfunded, which could lead to reduced benefits, lower inflation adjustments, or higher taxes in the future.

In other words, it may not be a great idea to rely on Social Security as your only source of retirement income. Alongside the uncertain fate of Social Security, the benefits alone might not be enough income. While some expenses will go away in retirement, new expenses will typically keep your lifestyle costs similar to what they are now.

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Getting Ready for Retirement

Unfortunately, the three-legged stool may no longer be accessible to the majority of workers. While it can be frustrating for young people to hear that they may not be entitled to the same types of retirement income that previous generations have enjoyed, there are ways to take action to ensure a fruitful retirement:

•   Take advantage of an employer match. First, know that many workers might want to save in multiple accounts for the long-term. This may mean managing some combination of 401(k), Roth IRA, brokerage, and savings accounts. But if you have access to a 401(k) or other workplace retirement account, you may want to take advantage of that first if there’s an employer match offered.

With an employer match, your employer contributes to your workplace plan when you do. So, for example, if you put in 6% of your pre-tax salary and your employer puts in 3%, they match at 50%. If your employer has a great match program, they may match at 100% (if you put in 6%, they put in 6%).

•   Diversify. Next, investors may want to consider having multiple investment types. This will allow them to diversify their portfolios and, ultimately, their income streams. While there’s no one combination of accounts that is perfect for everyone, you should explore how much you contribute to your 401(k), Traditional IRA, Roth IRA, and brokerage account. These different types of accounts have different tax benefits, both now and in the future.

•   Check in. It might also benefit investors to regularly check in on their retirement accounts. One way to check in and make projections is by using a retirement calculator.

Although saving for retirement can sometimes feel like a moving target, a retirement calculator might help you to understand whether you’re on track.

The Takeaway

If saving and investing for retirement requires a multi-pronged approach — even if it’s not the three-legged stool method — it’s important to stay organized and on top of all of the moving pieces. That’s because while the pieces may be separate, they’re all working together with the purpose of achieving one very important goal: helping you not just retire, but thrive during your retirement years.

If you need help making a retirement plan to tackle your goals, SoFi Invest® offers access to financial planners and educational resources. Plus, the Active Investing platform lets investors choose from an array of stocks, ETFs, and fractional shares.

Take a step toward reaching your financial goals with SoFi Invest.

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