For a long time, the retirement system in America was built around a simple concept: Those who had left the workforce would be supported by a "three-legged stool." These three legs included Social Security, pension income that was provided by an employer and guaranteed to last for life, and savings that people amassed during their working lives.
Now, sadly, the stool has become quite wobbly because it's missing one or more legs for most Americans. In fact, according to recent research from The National Institute on Retirement Security, just 6.8% of older Americans receive money from Social Security, a defined contribution plan (such as a 401(k) plan), and a defined benefit plan (an employer pension that provides guaranteed income).
This isn't likely to change any time soon, so future retirees need to prepare to build the retirement stability they deserve even if the three-legged stool has become a two-legged one.
Here's where most Americans do get retirement income
According to the National Institute on Retirement Security, it's much more common for seniors to rely only on Social Security than for them to have access to Social Security, a defined benefit plan, and a defined contribution plan. In fact, 40.2% of Americans 60 or over who don't work full time rely solely on Social Security.
Depending on retirement income from this entitlement program alone is a big problem, as it simply isn't set up to provide the money you need in your senior years. In fact, with an average benefit of $1,503 per month in 2020, Social Security alone will barely keep you out of poverty.
Some Americans do, of course, have income from other sources. In fact, the research showed that the number of older Americans currently receiving money from a defined contribution plan is largely equal to the number receiving money from a defined benefit plan. Just over 15% of Americans get income from one of these two plan types.
However, this is expected to change in the future, as an increasing number of workplaces offer only defined contribution plans and do not guarantee any minimum amount of retirement income at all. Sadly, as defined contribution plans replace standard pensions, more workers are likely to struggle, as plans employees must invest in don't have nearly the same effect on reducing elderly poverty as pensions promising guaranteed income.
How can workers cope without the three-legged stool?
Most people can't do much about the fact that they don't receive a pension -- few private-sector employers offer them. That means the ability to build a secure retirement will depend upon how much support is available from Social Security and savings.
The good news is, future retirees can take steps to maximize income from both of these sources. Workers, for example, can aim to get the largest possible Social Security benefit by making sure their earnings record is accurate, working at least 35 years (or longer if they hit peak earnings at the end of their career) and delaying their benefits claims as long as possible until the age of 70 to max out delayed retirement credits.
Of course, Social Security benefits can only increase by so much, even with the best of efforts. There's no limit, however, to how much workers can save for their future. Workers can contribute to a workplace 401(k) and other tax-advantaged accounts if eligible to do so, and can invest additional funds in a brokerage firm to help build a hefty retirement nest egg. Saving more than the traditional 10% of income that was recommended for retirement is the smartest course of action with so few workers receiving pension funds -- so it's imperative that anyone still in the workforce make a budget that prioritizes retirement account contributions.
And while saving right now may not be possible for everyone amid the 2020 recession, the longer you wait to begin saving, the harder it will be to amass enough funds. Since your retirement investments will be a key source of income to support you in your later years, get started contributing to your accounts ASAP and aim to contribute as much as you can.