Top Takeaways

• Many people underestimate the importance of financial security in building an emotionally fulfilling retirement.
• The reality for today’s retirement savers is very different from generations in which people could reliably depend on a combination of pensions, Social Security retirement benefits, and personal savings to support them.
• Annuities can help fill the role pensions once filled in the U.S. retirement landscape as a source of lifetime income.
• Financial professionals can help retirees create and execute retirement plans that provide growth potential and manage savings throughout their lifetimes.

Most people intuitively understand the emotional importance of the three pillars of family bonds, social connection, and having a purpose in retirement. But the fourth pillar—financial security—is about more than numbers on a page. It’s just as vital to a senior’s holistic retirement health.

On this episode of The Wave Strength, host Caroline Elrod, Retirement Strategies Group Manager, JD, CLU®, talks with Pacific Life’s Ruth Schau and renowned Certified Financial Planner, Social Security savant, and public speaker Mary Beth Franklin about how retirees can effectively address their financial needs in retirement without sacrificing the emotional element.

Financial Security Is More Than Numbers

When conceptualizing retirement, seniors often make one of two mistakes. The first is thinking of retirement solely in terms of numbers. For these retirees, the planning process may be reduced to striving to save a certain number of dollars. This can be a misguided approach that runs the risk of isolating savers from what makes retirement meaningful: having fulfilling experiences. “Retirement really is more about how you spend your time,” Franklin says, “not just how you spend your money.” It’s important for retirees to see their savings as a tool to facilitate fruitful, emotionally satisfying lives via the other three pillars of retirement—family, purpose, and social connection.

On the other hand, some seniors may neglect the importance of financial security in favor of emotional fulfillment. They may make the mistake of assuming finance is unrelated to emotion—that hard numbers don’t play a role in overall satisfaction. While it’s true that family, purpose, and social connection are all equally important facets of an intrinsically meaningful retirement, retirees should be careful to avoid devaluing their finances. Seniors must first feel secure enough financially to pursue the things that make their lives feel meaningful. “Increasingly, people are looking for secure, guaranteed sources of income so essentially they can sleep well at night,” says Franklin.

The New Retirement-Planning Reality: From Three-Legged Stool to Pogo Stick

Only a few generations ago, pensions predating ERISA's required vesting schedule for benefits were common sources of retirement income—benefits of staying with one employer throughout one’s career. Conventional wisdom established the “three-legged stool” approach to retirement savings, which outlined the three main sources of retirement funds: pensions, Social Security retirement benefits, and personal savings.

These days, that solid three-legged stool has been reduced to a pogo stick. Pensions are no longer a feasible expectation for most Americans, and personal savings are often inadequate to keep up with the ever-increasing demands of inflation. The current reality leaves only Social Security retirement benefits to keep seniors afloat—and Social Security “does have some long-term financing problems,” says Franklin.

With so many exposed to this elevated level of risk, retirees and pre-retirees have been forced to adapt with new savings models. But where should they start?

Rethink Saving with the Retirement Income Pyramid

Mary Beth Franklin has her own suggestion: the Retirement Income Pyramid. The most stable sources of income serve as the foundation of the pyramid, and more incidental or unique sources make up smaller portions toward the top. For example, a hypothetical pyramid might look like this:

1. Social Security retirement benefits—This is the nice, solid base of most Americans’ retirement funds. Savers are often most familiar with this income source, as employees pay Social Security payroll taxes for the duration of their careers.
2. Retirement-savings plans—These would be savings accounts such as 401(k)s, traditional and Roth IRAs, 403(b)s, etc. The combinations and allocation of funds into these various accounts will depend on the senior’s specific financial and lifestyle circumstances.
3. Personal savings and other assets—This layer is characterized by savings accounts, personal investment accounts, CDs, other non-liquid assets, etc. For example, homeowners may consider selling their properties for smaller homes that better meet their needs.
4. Incidental income—This makes up the smallest portion of a retiree’s income. These are highly dependent on individual circumstances and will be different for everyone. For example, “Maybe you have income-producing rental property,” Franklin says. “Maybe you have inheritance from your parents. Maybe you have a settlement from a divorce.”

Financial Professionals Can Help the Process

With so many ways to arrange and spend down assets, it can be overwhelming for retirees to decide which strategies to implement. Every Retirement Income Pyramid is different, which means retirees will likely need guidance to work out what’s best for them. This process is further complicated by issues with language.

For example, Mary Beth Franklin and Ruth Schau both agree that they personally see annuities as excellent options for clients looking to add a source of predictable lifetime income to their retirement portfolios. But many clients are intimidated by annuities based on an outdated understanding of what they do. Franklin argues that the function of an annuity can be clarified by financial professionals: “It's protected lifetime income. I think people need to understand this new vocabulary. And if ‘protected lifetime income’ makes them feel more comfortable than ‘annuity,’ let's retire the word ‘annuity.’” Of course, it’s also important to keep in mind that annuities are not right for everyone, and speaking with a financial professional can help retirees determine whether an annuity would be helpful for their specific goals and needs.

About Mary Beth Franklin

As a financial journalist with more than 40 years of experience and a Certified Financial Planner designation, Mary Beth writes about big-picture policy issues, such as the federal budget, tax legislation, and consumer-focused personal finance advice with a focus on Social Security. She has received numerous awards for her publications, and her work has been widely praised for helping both consumers and financial professionals build solid retirement-income plans.

About Ruth Schau

Ruth works with companies and their financial professionals to customize strategies that help address the financial risks inherent to pension plans. Her focus is with organizations who sponsor defined contribution (DC) plans, such as 401(k) or 403 (b) plans, to provide guaranteed lifetime income options for plan participants.