Mike Fager and Craig Fetty
Picture a wooden stool. Depending on your familiarity with this age-old piece of utility furniture, you might be picturing four legs, or you might be picturing three. Which of the two do you suppose is more stable?
The answer, of course, is the one with three legs. For a four-legged stool to balance properly, all four legs have to be perfectly identical in length. But with a three-legged stool, even if one of the supports is a little too long or a little too short, the structure remains perfectly stable and very difficult to knock over. Planning for your retirement is similar. Thinking about it like you would a three-legged stool is the best way to ensure a stable, balanced, and comfortable lifestyle during your golden years.
The first leg of our three-legged stool of retirement is debt. The goal is to have little to no debt by the time you begin this new phase of your life.
The second leg is your nest egg. The more robust this nest egg is at the point of your retirement, the more comfortable your lifestyle will be.
The third leg is a source of income. For most people, this means either Social Security, a pension, or both. Depending on your circumstances, this leg could represent the primary means of financing your lifestyle, or it could represent supplemental finances that prevent your nest egg from dwindling too quickly.
If, upon retirement, all three legs of the stool are sturdy and strong, then your plan and your lifestyle will probably not tip over. So, how do you get there?
It’s all about identifying the best strategy for your unique situation. Then, it’s important to maintain the discipline it takes to stick to the strategy through good times and bad (and believe me, as someone old enough to have weathered three major recessions, we can assure you that, no matter what you do, the bad times will occasionally happen).
As an aside, if you have begun work on creating your nest egg, then congratulations are in order. You have already demonstrated the kind of discipline it takes to build a solid three-legged stool for your retirement. It’s not easy to save, after all. Saving requires a level of patience and fortitude that not everyone naturally possesses. Be grateful for these qualities, because unless you get hit in the head with a falling rock, you’re very unlikely to change your habit for saving. That habit will serve you well in the years to come and will greatly enhance your chances for success in retirement.
When all three legs are in balance, not only does your retirement become stable, but your portfolio continues to grow. Through this stability, you will actually build wealth during retirement instead of burning through it.
Framed this way, it all sounds so simple. But at the start of this post, we mentioned a stool with four legs. What is that fourth leg—the one that threatens to throw the whole operation off balance? That leg is spending. Of course it is impossible not to spend money as you approach retirement. Life can get expensive. The trick is to maintain your discipline and keep your spending under control. Even if you make spectacular amounts of money, it is important not to fall into the trap of always spending just a little more than you make.
If you find yourself making more and more every year while your financial situation doesn’t seem to be getting any better, chances are you’re allowing that fourth leg of the stool to throw your portfolio off balance. Revisit your discipline and create a solid plan with your financial advisor, and soon, your previously imbalanced stool will be supported by three legs that will support you comfortably into your retirement and beyond.
Any opinions are those of Mike Fager and Craig Fetty and not necessarily those of RJA or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
