The New Three-Legged Retirement Stool: You, You, And You

There is a new three-legged retirement stool we should all be aware of. But first, let's review the old three-legged stool for retirement. It consisted of:

1) Pension (Company)

2) Social Security (Government)

3) Personal Savings (You)

Given less than 15% of Americans have pensions or will receive pensions, no longer is having a pension part of most Americans retirement plan. Therefore, we can throw pensions out the window for future generations. For those of you with a pension, bless you. Your pension is perhaps more valuable than you realize.

Given our Social Security system is underfunded by ~30%, the government will either cut the average Social Security benefit by ~30% or raise the minimum age eligible for collecting Social Security by at least several years.

As a result, relying on a government that has perpetually mismanaged our finances is not a wise retirement strategy. Besides, the average monthly Social Security benefit for 62 – 70 year olds is only $1,827 in 2023 according to the Social Security Administration.

Personal Savings (You) is the only leg of the old three-legged stool that's able to provide support. Everybody who has the opportunity to contribute to a 401(k) plan should. According to the Bureau of Labor Statistics, only about 55% of the American workforce has access to a 401(k) and only about 38% of the total workforce participates.

Meanwhile, for those who do participate, the average 401(k) contribution was only about 6.5% of salary when employers didn’t contribute and 11% of salary when employers contribute. Only 18% of 401(k) participants save more than 10 percent of their salary for retirement.

New 401(k) Maximum Contribution Limit For 2023

For 2023, the new 401(k) maximum employee contribution stays at $22,500, u p from $20,500 in 2022. For 2023, the employer maximum contribution limit is $43,500. Therefore, the total contribution limit is $66,000 for those under 50. If you are over 50, then the total contribution limit is $6,500 more, or $73,500.

Do not underestimate the power of working for a stable and highly profitable employer with a strong benefits program. 401(k) matching or profit sharing can significantly boost your retirement funds over time compared to working for a sexy startup that might not even have a 401(k) plan due to a lack of profitability.

When I left my day job in 2012, I forewent roughly $20,000 a year in profit sharing. But at least I got them to pay for my MBA and give me a severance. Now, I contribute as much as possible to a Solo 401(k), SEP IRA, and 529 plan.

Historical 401(k) contribution limits through 2023

The New Three-Legged Retirement Stool

Now that we understand the old three-legged retirement stool, let's look at the new three-legged retirement stool. It consists of:

1) Personal pre-tax savings (You)

2) Personal after-tax savings (You)

3) Personal hustle / X-Factor (You)

Everybody should figure out a way to contribute the maximum to their 401(k) savings each year, even without a company match. Your goal is to minimize your taxable income, allow your investments to compound tax-deferred for as long as possible. Then build a large enough after-tax portfolio to give yourself options to change jobs, take a break, be a stay at home parent, or retire before the age of 59.5.

After-Tax Investment Amounts By Age To Comfortably Retire Early

Clearly, in order to build this type of wealth, it will take a tremendous amount of discipline. You can’t go blowing your money on stupid things you don’t need. You need to continuously reinvest the large majority of your savings into risk-appropriate investments. Delay your gratification.

The third leg of the new retirement stool is earning money doing something you enjoy: your X factor.

One of the most dangerous things about post-work life is letting your mind and body atrophy. This is one of the reasons why I let my dad edit most of my posts. The more you can stay active post traditional work, the better your retirement lifestyle.

In my case, I stay active in post-work life by:

  1. Being a stay at home dad
  2. Coaching high school tennis for 3-4 months a year
  3. Recording the Financial Samurai podcast (Apple)
  4. Writing daily on Financial Samurai
  5. Working on the next great personal finance book (takes two years to produce)

Most of these activities have a monetary component that enables me to better preserve my retirement nest egg. In retirement, you want to find something you're good at, that provides meaning, the world needs, and that can generate income. In other words, you want to find your ikigai for a more fulfilling retirement.

What you'll discover after leaving full-time work is that it becomes extremely difficult to spend down principal. After decades of accumulating wealth, it's hard to go in reverse.

Being stay at home parents allows us to save ~$3,000 a month on childcare. Coaching high school tennis brings in about $1,250 a month and allows me to build relationships with other members of the community. Being a professional writer makes several thousand a year. While writing daily on Financial Samurai keeps my mind sharp and brings in some spare change to boot.

But most of all, these activities give me a sense of purpose and meaning.

Keep Building Your Three-Legged Retirement Stool

One of America's biggest retirement failures is allowing employees to decide how much they should save for retirement.

Given the choice between spending money on cheeseburgers, cars, fancy clothes, shoes, vacations, electronics, and more cheeseburgers or saving for a retirement that is decades away, obviously the majority of Americans are going to choose the former.

Thus, it is unsurprising that roughly 66% of Americans are overweight and the median retirement savings for all families is less than $10,000. Our lack of discipline is literally ruining our lives.

We should have adopted a forced retirement savings system where companies automatically deduct money from each employee's paycheck for retirement, much like how payroll taxes are automatically deducted. It's worked in countries like Australia and Singapore.

But it's already too late for change. Therefore, the only thing we can do is count on ourselves. If we can depend on our own hustle to survive in retirement, all other government benefits will simply be a nice bonus.

Finally, if you have the audacity to retire early, the new three-legged stool for retirement becomes even more important. Your chance of retiring for 40 or 50 years goes way up. Therefore, investing regularly and planning ahead is even more important.

Generate Retirement Income Through Real Estate

Given we need to depend more on ourselves in retirement, I believe the best way to generate income is through real estate. Real estate accounts for about $150,000 out of our ~$380,000 annual passive retirement income.

The combination of rising rents and rising capital values is a very powerful wealth-builder. In retirement, you income buyer power will continue to increase as a result.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates likely to stay low forever, the value of cash flow is up.

Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore. 

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the easiest way to gain real estate exposure. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. 

Recommendation To Build Your Retirement

Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. 

I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management. The new three-legged retirement stool is here to stay!

Personal Capital Retirement Planner Tool

Related: Two Retirement Philosophies Will Determine Your Safe Withdrawal Rate

About The Author

70 thoughts on “The New Three-Legged Retirement Stool: You, You, And You”

  1. In terms of real estate, what would you say is a better investment to generate rental income with moderate appreciation – to invest in a single family, multi family or condos? Also, are there opportunities in the Bay area or SoCal to achieve this given that real estate prices are high or is it better to look else where? Thanks in advance for sharing your thoughts.

    1. I’m working through the same questions right now and trying to decide between passive or active real estate. Would love to see responses here.

  2. We had a forced retirement savings plan in America. We called it social security. Unfortunately, the government spent it all.

    1. Not all. Social Security is “only” underfunded by about 25%. However, we will surely have a budget deficit with all this fiscal stimulus, which is necessary to help millions of Americans in this pandemic.

  3. Dear Sam,

    I love your last newsletter “One Rule for Them, One Rule for Us” and your point that if politicians were as vulnerable to the pandemic as the people were, they might make different policies. I had no idea mayors made this much money.

    I suspect you meant this but did not say this, but I would like to add perhaps the solution is not to focus on “you,” for no one thrives alone. What if we rephrased this to say the focus should be how we can lift up others and create value for them, which in turn creates value for us?

    I suspect this is what you meant but simply did not elaborate upon as it’s not the primary focus of your blog.

    Further fodder for those who love your idea: Simon Sinek’s YouTube video on “Why Leaders Eat Last.” When leaders choose to eat first, they betray the trust the people invested in them when we rewarded them in the first place. We are supposed to be giving leaders awesome stuff so they protect the tribe (i.e. us). As we take care of our own needs, perhaps we can try to change the system so we privilege a different type of leader. Maybe this seems pie-in-the-sky but we at least have to try!

    I am also listening to Simon Sinek’s A Little Bit of Optimism podcast, which has more ideas on this topic. In it, he says there’s a new book called _Survival of the Fittest_ in which the co-authors reveal Darwin did not mean humans are meant to privilege “survival of the strongest.” Rather, Darwin meant our best strategy is to privilege the “survival of those who best protect the tribe.”

    We need to fix our model of what a good leader is to thrive. Perhaps, if you like this idea, you could propose it to your following?

    I forwarded your latest newsletter to my private students as I want them to know what causes we have to champion so they can work on fixing this!

    Thank you for teaching me about finances. It’s really odd how learning about money is not part of a traditional education. Probably because we mistakenly think it’s a dirty word. In addition, I know you want to set up small businesses for your son as you know how Asian-American kids endure the toughest college admissions quotas.

    Possible solution: I teach kids how to communicate with power and eloquence + set up their own social impact endeavors based on their passions, so if you want my two cents, let me know. I’ve been running my teaching business for 22 years now by word-of-mouth alone. Sometimes kids learn more peacefully from non-parents. It’s just human nature.

    P.S. The Clinton Foundation just commissioned a kid-crafted collaborative children’s book from my students, so we have some pretty neat things going on. This honor is based on a kid-crafted charitable kid’s book library my students built over the past decade that has raised over $500,000 for charity with the books my students built with their own hands and hearts.

  4. Sam,

    There is much that I agree with in your article! The rules of retirement have changed, and it’s all on us (the investors) now. If you’ll permit, I would like to challenge the conventional wisdom that everybody should figure out a way to contribute the maximum to their 401(k) each year.

    In Blog #12 I compared the ROI of a typical 401(k) investment with that of a typical single-family rental, and the single-family rental is superior in the first year by almost 10% and by more than 15% in the successive years. I understand that real estate isn’t for everyone, but these numbers are compelling, and nobody talks about them. And, these numbers DO take into account the company match and the deferred taxes of the 401(k).

    The Prolific Investor

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