Building Your Three-Legged Stool

by Craig Moser on April 13, 2017

When thinking about retirement, it can help to envision a three-legged stool.  Everybody knows a two-legged stool isn’t reliable because you have no stability.  If you sit or stand on a stool with only two legs, you’re going to end up in the floor or on the ground.  For a stool to be stable and reliable, it must have at least three legs.  The same is true for retirement.

I recently read an article in Consumer Reports, explaining over half (50%) of people retiring in the 1960’s had social security, an employer-sponsored pension, and personal savings to provide retirement income.  This was their three-legged retirement stool.

Today, only 1 in 4 people have a pension.  This means 3 out of 4 Americans rely on personal savings and social security for a 20 to 30-year retirement.  The responsibility for retirement income has shifted from the employer to the individual.

Your Three-Legged Stool

Many people feel uncertain about retirement because they depend on social security and personal savings for retirement income.  These two legs of your retirement stool are critical and necessary.  However, without that third leg, your stool isn’t stable and will eventually topple over.  You need the third leg to create stability.  When building your retirement stool, you need an investment platform that replaces an employer-sponsored pension.

Let’s face it, stocks and bonds are not predictable when you’re setting up a steady cash flow for retirement.  For example, in 1988 you could get a 6-month CD paying 7.15%, a 1 year CD at 7.48%, and a 5-year CD which would pay 8.26% interest.  In this scenario, depositing $250,000 in a 5-year CD would generate $20,650/ year in interest income.

Fast forward to 2015, those average rates (according to were:

6-month CD paying   0.16%, a 1 year CD at 0.27%, and 5-year CD paying 0.85% interest.  So, on that same $250,000 your interest income would have paid $2,125/ year.  That’s a   loss of $18,525/year in income from 1988.  Stocks and bonds just aren’t predictable.

Three Legged Stool Chart


I am definitely a believer in the corporate world.  Fortunes have been made and lost based on stock investments.  If stocks were predictable, my job and your retirement would be a whole lot easier.  Unfortunately, the risk of loss is a huge obstacle in retirement.

Look at IBM.  A great company whose stock was around $214 in March of 2013.  By February of 2016, their stock had fallen to $118.  This example shows how varying economic environments and constant innovations impact the price of stock.  Results are unpredictable and can vary significantly.

Pension Replacement

That brings me back to the pension piece of your three-legged stool.  A predictable cash-flow that can’t be outlived is what made the difference in our parents’ retirement income.  If you don’t have a company-sponsored pension, you need to create the same type of guaranteed cash flow during your retirement.

Annuity Roundup

At a minimum, building your three-legged stool requires social security, a pension or pension-type investment, and personal investments.  If you don’t have a pension and need to stabilize your cash flow then, an annuity is the only game in town.

For many people, “annuity” is a word that may evoke an emotional response.  Depending on what you read or who you listen to, you might think an annuity is a rip-off.  You may even be a card-carrying member of the “Anti-Annuity Coalition.”  If this describes you, I strongly encourage you to understand what an annuity actually, and what it is not.

An annuity is a contract between you and an insurance company.  One very big potential benefit is that an annuity can provide guaranteed income for your entire life.  Just remember the devil is always in the details.  “Annuity” is just a word.  What an annuity does are the benefits.  Because you need to understand differences, a very brief discussion of the differences is important.

Variable Annuity

Your money is invested in “mutual fund like” investment choices.  The value of your actual investments go up or down based on those investments.  While expensive to own, you may elect to add a guaranteed income rider to the contract.

Immediate Annuity

You basically buy a pension.  Depending on how you set the contract up, you can have income for your life or both your life and your spouse’s life.  You can also determine the number of years an immediate annuity provides income even if you and your spouse were to pass away early.  Again, the details are very important.  The trade-off with an immediate annuity is that you lose future access to those funds.

Fixed Index Annuity

A very popular choice, you get crediting of interest based on the return of a stock or bond index.  Your investment doesn’t go down if the index declines, and you get an income for life.  This piece is just like a Variable and Immediate Annuity.  Also, if you pass away with money remaining from your investment, it passes to your loved ones via a beneficiary designation.  If designed properly, this works like your IRA or 401(K).

Your Income Plan

As you can see, an annuity can be a very important part of a well-structured income plan.  Although it provides the final leg of your three-legged stool, it shouldn’t be the only choice in your plan.

Components of a well-structured plan include things like liquidity- annuities are not inherently designed to be liquid.  Yes, you can get to some of the variable or fixed index annuity values, but if you do, you may alter how your income guarantees perform. So, you need to have money in your overall plan that is accessible without any strings attached.  Next, you need growth.  If you are going to grow the portion of your investment portfolio that you may need in the next 10 years or so, you need to be able to make investment decisions that allow you to be in the best place at the right time.  A well-built tactical investment portfolio designed for growth of value should be a part of that account.

If a portion of your money is not needed in the next 3-5 years, it can go through an investment cycle.  If you use tactical investment strategies, rather than follow a buy and hold approach, you increase your probability of success.

This long-winded answer is that choosing an annuity MAY be a good choice for part of your retirement plan.  It could be a good and stable leg for building your three-legged stool.

How will you know if an annuity is right for you?  Work with an experienced trained professional who will take the time to work with you, answer all of your questions, bring up issues you may not even know to ask, and then craft a plan that will best meet your needs.

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