The Four Pillars of U.S. Retirement

1. Introduction

Prudential has developed the “Four Pillars of U.S. Retirement” as a framework to discuss how Americans will prepare for and live in retirement. The Four Pillars have their origin in the traditional ‘three-legged stool’ of retirement security: Social Security, Employment-Based Plans, and Personal Savings. To this, Prudential has added a fourth Pillar, Retirement Choices, to capture emerging, non-traditional tools available for today’s and tomorrow’s retirees.
There are many investment and insurance products that can play a part in saving for retirement, generating retirement income, and protecting retirement assets. Several of these products are referenced in the Pillars below. For the purposes of this paper, any given product is shown in only one Pillar. In practice, many of these products span multiple Pillars.

Table 1
2. The Importance of a Holistic Approach

For most Americans, no one Pillar is sufficient to meet retirement income needs. To save and plan effectively for a secure retirement, individuals should consider all Four Pillars.

2.1 Social Security

Though the nature and reliability of Social Security is a hot topic today, the fact is that, on average, Social Security replaces about 42%3 of income. On the other hand, the national discussion on Social Security brings into sharp focus the need for Americans to consider those sources of retirement income over which they have more direct control — that is, the other three Pillars.

2.2 Employment-based Plans

Today, fewer than one in five workers are covered by a defined benefit pension plan only, through which they can expect to receive a guaranteed retirement income.
By contrast, an increasing number of workers — nearly six in 10 — are covered only by 401(k) or similar defined contribution plans4. With the shift from defined benefit to defined contribution plans, responsibility for saving for and generating a guaranteed retirement income is transferred from institutions to individuals.
Among the most important things individuals covered by defined contribution plans can do today to help guarantee a secure, comfortable retirement are:
• Enroll — at the earliest opportunity (historically, about one-quarter of workers eligible to participate in a defined contribution plan fail to do so).
• Contribute — at least enough to get the full benefit of a company match, if one is offered, and increase contribution levels over time.
• Diversify — among investments suitable to one’s age and risk tolerance. Many plans offer programs to assist participants with these important decisions.
• Think income — as retirement approaches, consider how best to convert your retirement accumulation into a stream of retirement income that cannot be outlived.

2.3 Personal Savings

Whether or not Americans have access to an employment-based plan, their personal savings can be a key source of retirement income. Individuals might include assets in annuities and IRAs, as well as portions of other personal savings, in their retirement planning.

2.4 Retirement Choices

Remember that there are some aspects to planning for retirement beyond ‘saving’. Workers may plan to approach retirement on a ‘phased’ basis and continue working part-time. Some may rely on the equity they have built in their homes. And, planning for retirement is more than just building as big a nest egg as possible — it is also protecting those assets, eventually converting them into income, and, perhaps, passing something on to future generations.
Whether saving through plans offered at their place of work or on their own, Americans should remember the basics: start saving early, save more, and seek financial advice to develop a retirement plan that encompasses each of the Four Pillars.

This part of our publication presents texts which are not original. They are motivated and written under various contexts: they provide an insight on the fact that the lenghtening of the life cycle is of greater and greater concern and interest in many different directions. The counter-ageing society is an issue which needs to be perceived on the basis of a true, practical as well as theoretical, multidisciplinary approach. On the basis of this larger vision, the work, activity and research of any specialist can be better appreciated and given value within the framework of a global background of reference.
The strategy of the Four Pillars for Retirement has been also discussed in several publications of the Geneva Association. See in particular the special issues of The Geneva Papers on Risk and Insurance (normally one per year) and the Newsletter on the Four Pillars (normally two per year),
1 Prudential has prepared these materials to advance the discussion about the critical topic of preparing for retirement security and not to provide personalized advice. This document outlines products beyond those offered by Prudential. It does not serve to offer advice on product offerings that are suitable for every person. The reader should consult financial services professionals to develop a retirement security strategy that takes into consideration personal situations.
2 With the exception of bank deposits, products listed are not bank guaranteed/not FDIC insured/may lose value.
3 Social Security Administration: Overview of the Social Security Administration, p. 10.
4 Buesing, M. and Soto, M. (2006): “The State of Private Pensions: Current 5500 Data”, The Center for Retirement Research at Boston College, February, p. 3.

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