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Americans should have more than one source of retirement income, experts say—this is how many actually do


A new report finds that retirees that saved three sources of income were the best prepared for retirement — but a shockingly low number actually did.

The National Institute on Retirement Security, known as the NIRS, recently analyzed a set of reports made over the past decade and found that savers shouldn't rely solely on one source of retirement income to support them in their golden years.

But only 6.8% of today's retirees actually saved their income according to what NIRS considers to be the most dependable method of retirement saving: the "three-legged stool."

The three-legged stool is a metaphor financial planners have used to describe the three sources of income one should have in retirement, including:

  1. Social Security
  2. Defined benefit plans (also called pensions)
  3. Individual savings, typically through a defined contribution plan, such as a 401(k)

Each source of income forms a leg on the stool, together comprising the most stable trio of retirement incomes.

The minimum number of legs a stool needs to be balanced is three; therefore, experts demonstrate that removing even one of these legs, or incomes, renders the whole structure totally unstable.

NIRS found that there was a strong correlation between the poverty status of a household and the amount of retirement income sources it collected benefits from: Those who collect income from more income sources on the three-legged stool are much less likely to be poor, meaning they generate income below the federal poverty line.

That said, NIRS still acknowledges the impact each source has had in preventing elderly poverty on its own.

Social Security, for example, provides valuable support to today's retirees. According to NIRS' analysis, without access to Social Security income, the number of impoverished older households would have increased by over 200% to 11 million households in 2013.

Despite this, NIRS recommends Americans to contribute to additional sources of retirement income so that they'll be able to afford to live comfortably in their retirement, rather than subsisting off of the average $18,000 annual income Social Security recipients receive, which is a stark reality for a whopping 40.2% of today's retirees.

However, NIRS also found that not all older Americans had equal access to different retirement plans when they were working full-time. Even though the world of retirement saving has evolved, this is an issue that still exists today.

This is how Americans save for retirement today

There's one issue that continues to permeate Americans' efforts to save for retirement: access to the sources of retirement income outlined in the three-legged stool. Most Americans contribute to Social Security, but not all workers have access to 401(k)s through their employers and even fewer are offered defined benefit plans.

As a result, Americans are getting creative about how they save for retirement.

Here's what they're doing:

  • Funding IRAs: IRAs, or Individual Retirement Accounts, are an alternative to 401(k)s if your employer doesn't offer them to you. Read about the different types of IRAs and which ones may work best for you here.
  • Funding a regular investment account: Retirement accounts typically have a minimum age you can dip into them, but regular investment accounts allow more flexibility for those who want to retire early or simply want easier access their wealth.
  • Taking on side hustles: For many Americans, one job isn't enough to both cover expenses and build their nest eggs. Taking on a side hustle is a good way to provide an extra financial cushion for savers.
I really encourage all Americans to just get ahead of the curve. Calculate; extrapolate what their future costs will be in three to five to ten years and always try to get ahead of the curve by making more.
Sam Dogen
Financial expert and founder of the personal finance website, "Financial Samurai"

Some Americans have even discovered a loophole to save more for their retirements: opening health savings accounts, or HSAs.

Though HSAs were created to help Americans cover healthcare expenses, rather than supplement retirement savings, they have become a useful investment tool. This is because the pre-tax contributions Americans contribute roll over annually and grow to cover greater medical expenses.

Many Americans actually don't anticipate the growth of expenses, such as healthcare costs, when saving for retirement.

Sam Dogen, a financial expert and founder of the personal finance website Financial Samurai, initially retired in 2012 at 34 years of age, but after calculating his family's rising healthcare and education expenses, is "unretiring" to get ahead of them before they catch up to him.

"I really encourage all Americans to just get ahead of the curve," Dogen tells CNBC Make It. "Calculate; extrapolate what their future costs will be in three to five to ten years and always try to get ahead of the curve by making more."

Americans still struggle to reach retirement goals

Research from Schwab Retirement Plan Services indicates that 401(k) participants on average believe they need to have $1.7 million to retire, but not many are on track to get there. In fact, Americans broadly don't save nearly as much as they should for their retirements, leaving them grappling for ways to catch up.

NIRS encourages the protection and expansion of Social Security, as well as greater access to defined benefit plans and defined contribution plans for workers.

But many financial planners today no longer advise savers to rely on any source other than themselves to prepare for retirement.

For instance, Dogen follows his own three-legged stool to save for retirement. Dubbing the legs "You, You and You," he recommends savers to focus on personal endeavors, rather than rely on government or employer support.

The first "you" refers to personal pre-tax savings; contributing the maximum to 401(k) or IRA even if it's not fully matched, the second "you" refers to personal after-tax savings and investments, and the last "you" includes your personal efforts to make money leading up to and during retirement.

Dogen believes that working in retirement is a good way to stay active and maintain a better retirement lifestyle, but also notes that alternatively, relying solely on personal savings isn't enough of a cushion to prepare most Americans for the uncertainty of retirement like it might have been for previous generations.

Managing cash flow is fundamental to being able to do just about anything in your financial life on a well. The most boring part of personal finance is the most important part.
Douglas Boneparth
President and founder of Bone Fide Wealth

President and founder of Bone Fide Wealth, Douglas Boneparth, tells CNBC Make It that both working and retired Americans can also make changes in their day-to-day spending activities to better handle their finances. Developing good spending habits, he explains, leads to the ability to save consistently.

"By understanding how you spend your money and defining a lifestyle for yourself that you can afford, you can better afford to save consistently," Boneparth tells CNBC Make It.

Americans can achieve this by tracking their spending over the last 12 or so months, thereby gaining an intimate understanding of how they spend their money. Then, they can make conscious decisions about how they ought to spend their money and where they might need to cut back.

"Managing cash flow is fundamental to being able to do just about anything in your financial life," says Boneparth. "The most boring part of personal finance is the most important part."

Here's how much you should have saved at different ages throughout your career.

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