Retirement Income: The “Three-Legged" Stool 

Three Legged Stool | Transamerica

Traditionally, retirement income has been described as a "three-legged" stool comprised of Social Security, employer pension income, and individual savings and investments. With fewer and fewer individuals covered by traditional employer pensions, though, the analogy doesn't hold up as well today.

Social Security

According to the Social Security Administration, an estimated 161 million U.S. workers, 94% of all workers, are covered by Social Security. The amount of Social Security retirement benefit that you’re entitled to is based on the number of years you’ve been working and the amount you’ve earned. Your benefit is calculated using a formula that takes into account your 35 highest earning years.

While you can begin receiving Social Security retirement benefits as early as age 62, the benefits you receive can vary dramatically depending on when you begin taking them. Other factors, including whether or not you plan to continue working while receiving benefits, may affect your Social Security income.

The good news is that, for many people, Social Security will provide a monthly benefit each and every month. The bad news is that for many people, Social Security alone isn’t going to provide enough income in retirement.

Traditional Employer Pensions

If you’re entitled to receive a traditional pension, you’re lucky; fewer Americans are covered by them every year. In fact, according to the U.S. Social Security Administration, 50% of the workforce has no private pension coverage.

If you haven’t already chosen a payout option, you’ll want to make sure you know exactly how much income your pension will provide and whether or not it will adjust for inflation. 

Personal Savings

Your personal savings are fund that you’ve accumulated in tax-advantaged retirement accounts like 401(k) plans, 403 (b) plans, 457 (b) plans, IRAs, and annuities as well as any investments you hold outside of tax-advantaged accounts. 

Until now, when it came to personal savings, your focus was probably on accumulation – building as large a nest egg as possible. As your transition into retirement, however, that focus changes. Rather than accumulation, you’re going to need to look at your personal savings in terms of distribution and income potential. The bottom line: You want to maximize the ability of your personal savings to provide income during your retirement years, closing the gap between your projected annual income need and the funds you’ll be receiving from Social Security and from any pension payout. 


This information is intended to be educational in nature and should not be considered tax, legal, or financial advice. Because each person’s circumstances are different, you should consider your unique situation before relying on the information provided.