What does the "three-legged stool" model represent in retirement planning?

The "three-legged stool" model represents three sources of income for retirement, indicating a balanced approach to funding one’s retirement lifestyle. This model helps illustrate how most individuals can achieve financial security in retirement through a combination of personal income strategies.

Typically, the three legs of the stool include:

1. Social Security: This is the government-provided benefit that serves as a foundational income source for many retirees. It helps ensure that individuals have a basic level of income during retirement.

2. Employer-sponsored pensions or retirement plans: These represent the second source and can vary significantly by employer. Defined benefit plans or defined contribution plans like 401(k)s are commonly included in this part of the stool, providing additional financial support to retirees.

3. Personal savings and investments: This third leg emphasizes the importance of personal responsibility in retirement planning. It includes personal savings accounts, IRAs, and other investments that individuals accumulate throughout their working lives to supplement their income.

Together, these three components work in synergy to provide financial stability in retirement, making it crucial for retirees to address each aspect when planning. This model is pivotal in analyzing one’s retirement readiness and recognizing the importance of a diversified approach to income sources during retirement.