The second phase of retirement planning is to estimate the resources you currently have that will provide income to you during your retirement years. You may have heard about the so-called "three-legged stool." What this means is that you will fund your retirement primarily through three main sources.
- Social Security will pay you a percentage of your annual income based on how much you made over your lifetime. On the average, social security benefits amount to about 40 percent of preretirement income. The amounts are skewed to provide greater percentage of benefits to those at the lower income levels. That is, if you had a relatively low income, social security benefits would provide about 70 percent of your preretirement pay. If you were relatively highly paid, social security would replace only about 30 percent (or even less) of your preretirement salary.
- An employer-provided pension may be generally equal to anywhere from 50 percent to 70 percent of your preretirement salary. The amount of the benefits may or may not be easily computed, depending on whether the pension is a defined-benefit plan or a defined-contribution plan.
- Personal savings and pension plans for the self-employed will provide as much or as little as you managed to save during your working years. This is the aspect of your retirement fund over which you have the most control. It is up to you to determine your savings and investment strategies. If either of the other two legs of the "stool" are missing or deficient, this is what you will rely on for your retirement income.