Four pillars of retirement planning

Posted by Jay

July 12, 2005

Traditionally Americans have been taught to look at retirement planning as a “three-legged stool,” which includes Social Security, employment-based plans and personal savings. Prudential Financial, a firm that provides several options for personal finance and retirement planning is adding one more leg to the stool, essentially turning it into another piece of furniture. While it calls the new framework “The Four Pillars of U.S. Retirement,” the underlying idea is that traditional form of thinking about retirement may be outdated. According to their approach, retirement planning should also include “retirement choices” to capture emerging, non-traditional tools available for today’s retirees. (Related article: How to save more for retirement?)

The Four Pillars framework includes:

Pillar #1: Social Security

On average, Social Security replaces about 40 percent of income. The national discussion on Social Security brings into focus the need for Americans to consider those aspects of retirement security over which they have more direct control, such as employment-based plans, personal savings and retirement choices. It appears that while Social Security privatization initiative is all but dead, it does not mean that Americans should sit back and relax knowing that their check will come in the mail. Republicans are unlikely to give up any time soon.

Pillar #2: Employment-Based Plans

With the ongoing shift from traditional defined benefit pension plans to 401(k) plans, responsibility for saving for and generating a guaranteed retirement income is transferred from institutions to individuals. For workers with access to 401(k) or similar type plans, among the most important actions they can take to help guarantee a secure, comfortable retirement are to enroll at the earliest opportunity; contribute at least enough to get the full benefit of a company match, if one is offered; diversify among investments suitable to their age and risk tolerance; and, as retirement approaches, consider how to best convert retirement savings into a stream of income that cannot be outlived. (Related article: Guidelines for retirement planning)

Pillar #3: Personal Savings

Personal savings are a key source of retirement income. Individuals should consider assets in annuities and IRAs, as well as portions of other personal savings, in their retirement planning.

Pillar #4: Retirement Choices

There are aspects of retirement planning that fall outside of “saving.” Many Americans may choose to continue working in retirement, while others may consider the equity they’ve built in their homes as a potential retirement income source. In addition, protecting retirement income through annuities and long-term care insurance, and providing wealth transfter through life insurance, are other choices individuals should consider.

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