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How to Restore the Three-Legged Retirement Stool

Jan 18, 2023

Blueprint Income Team

The rise of the 401(k) and the corresponding decline of defined benefit pension plans upended the three-legged stool model for retirement savings, leading to retirement insecurity. Blueprint Income is working to restore the broken leg of the stool by offering easy access to compare and purchase annuities.

  • Retirement planning in the 20th century was best accomplished with a three-legged retirement stool that included Social Security, a pension, and personal savings
  • The rise of private savings via the 401(k) and the corresponding decline of defined benefit pension plans upended the three-legged retirement stool model, leading to retirement insecurity
  • Annuities can fix the leg broken by the decline in defined benefit pension plans as a way for people to earn a second source of guaranteed, lifetime income

The Three-Legged Retirement Stool has Changed

Preparing for retirement in the 21st century is dramatically different than in previous generations. In the second half of the 20th century, people counted on a mix of Social Security, employer-sponsored pensions, and personal savings to support them in retirement. This model was called the three-legged retirement stool, after the three ways that people generate income for themselves for retirement. Starting in the 1980s, that model changed as companies switched from offering employees defined benefit pension plans to sponsoring employee-managed defined contribution accounts named the 401(k).

The rise of 401(k) plans transformed the once stable model for retirement planning into a tenuous one where people had to contend with the possibility of outliving their savings. A recent Transamerica Institute Survey found that 57% of Generation X and 55% of Baby Boomers cite outliving their savings and investments as one of their greatest retirement fears. Among Generation X, many of whom began working around the time that the 401(k) was first introduced into the workplace, only 14% are “’very confident” that they will be able to fully retire with a comfortable lifestyle.

Part of the reason that people are not confident in their capacity to retire is that the 401(k) system squarely places the onus of navigating retirement on them. In the fall of 2017, the Government Accountability Office issued a report on retirement savings in the US, citing three key obstacles that people face in saving for retirement:

  1. "Access: Accessing retirement plans through their employers.
  2. Saving: Accumulating sufficient retirement savings.
  3. Retirement: Ensuring accrued savings and benefits last through retirement."

Today, only 50% of workers are saving for retirement, according to the Bureau of Labor Statistics, National Compensation Survey. Problematically, 28% of non-retired adults surveyed by the Federal Reserve Board of Governors in the Report on the Economic Well-Being of U.S. Households claimed to have no retirement savings or pension. Low retirement savings rates present a significant societal challenge as governments will face the financial burden of supporting impoverished seniors, and businesses will have to contend with lessened consumer demand for goods and services.

A big reason that some people do not save for retirement is they lack access to an employer-sponsored retirement savings plan. The Bureau of Labor Statistics, National Compensation Survey shows around 1 in 3 workers do not have access to an employer-sponsored retirement plan. Of those workers who lack access, The Federal Reserve Board of Governors Report on the Economic Well-Being of U.S. Households found that 41% of survey respondents would participate in a 401(k) if they were offered one.

Some promising trends that may increase access to retirement savings include state-sponsored auto-IRA plans and the widespread practice of employers automatically enrolling workers in their 401(k). Auto-IRA plans are state-sponsored, private-sector administered IRAs for employees whose employer doesn’t sponsor a retirement plan. Employees are automatically enrolled in the plan and contribute a small percentage of salary into an IRA. While these two trends may boost access to retirement savings plans and raise the proportion of the population accumulating sufficient assets for retirement, they do not adequately solve for longevity risk, or risk that ones’ assets last throughout retirement.

Defined benefit pension plans reduced longevity risk because they provided income that lasted for life. For modern workers who lack access to defined benefit pension plans, a guaranteed, lifetime income stream may seem out of reach. The Transamerica survey found that “fifty-six percent of Millennials expect their primary source of retirement income to be self-funded through accounts such as 401(k)s, 401(b)s, and IRAs or other savings.” In short, Millennials will have to navigate longevity risk on their own.

The Online Annuity Marketplace

Blueprint Income’s online annuity marketplace offers easy access to review, compare and purchase annuities, which may help restore the three-legged stool for retirement, replacing now scarce defined benefit pension plans. If you're just starting to explore your annuity options, learn more here and start your journey below:

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Blueprint Income Team

We are a team of finance, insurance, and actuarial professionals working to make it easier for everyone to achieve a steady and comfortable retirement. We write about annuities (the good and the bad) and provide strategies to help Americans prepare for retirement.


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