The 3 Legged Stool: A Retirement Theory


Have you ever heard of the “3 legged stool” retirement theory? With as much personal finance reading as I’ve done over the past almost 2 years, I thought I had heard it all but somehow this one escaped me until just last weekend.

I was working at my part-time job when a co-worker started asking me about investing and retirement saving options. Why these people ask me about personal finance I’ll never know because I certainly haven’t told them about my pseudo-anonymous online blogging career about personal finance, but I digress. After sharing with her my limited knowledge of investing, as my main personal finance interests are debt payoff and entrepreneurship, I was surprised when a customer chimed in from across the store and asked if I had ever heard of the 3 Legged Stool theory of retirement investing.

Since I hadn’t heard of it myself, I decided to do some research on it and share that with you today.

What is the 3 Legged Stool Theory?

According to

The 3 legged stool is a metaphor for how the post-World War II generation looked at planning for retirement. The three legs represent an employer pension, employee savings, and Social Security. You need each one to build a strong retirement foundation. Without one, the stool would not function.

This metaphor is often attributed to Franklin D. Roosevelt, who created the Social Security program.

Does the 3 Legged Stool Still Exist?

Personally, I don’t think relying on the 3 legged stool for all of your retirement savings needs is a good idea anymore. The social security leg of the stool is much shorter than what it was when this theory was first invented in the mid-1900s and in fact some people believe that Social Security will be entirely non-existent by the time that millennials begin to retire many years from now. This leaves you with, at best, a 2.5 legged stool.

Then when you look at the employer pension leg of the stool, you’ll notice that employer pensions have pretty much gone by the way-side in the past 20-25 years. These days employers choose to offer a defined contribution plan rather than a defined benefit plan, making your employer 401(k) essentially a part of the third leg that is employee savings. Sure, some employers still contribute to employee 401(k)s, but for the most part this account is employee-funded.

Now you have one long leg and 2 short legs on your stool and you’ll be lucky if you can balance on it at all when it comes time for retirement.

Today’s 4 Legged Stool Theory

In light of these changes, a new theory has emerged in the past few years: the 4 legged stool. This theory means that you will take part of the long leg of the 3 legged stool, personal savings, and invest it in a passive income producing asset, like real estate. Thus you now have a stool with 4 legs: employer pension, employee savings, Social Security, and passive income investments.

With this new theory in mind, do you have a plan in place to build your 4 legged stool?

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and Shoeaholic No More*

Photo courtesy of: Crimthann Fid-Nemed

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12 thoughts on “The 3 Legged Stool: A Retirement Theory

  1. Hi Kayla! I’m from the UK, so we have different ways of retirement planning, we don’t have a 401K for example, but I guess the theory behind the 3 and 4 legged stool is the same. For me, personally, I hope to achieve a good retirement fund with passive income (real estate and other passive businesses), as well as our own savings and our state pension, albeit small – I think this is similar to your social security? I’m self employed so I don’t have a company pensio. I’m looking into private pensions here in the UK but I’m not sure investing in one of these is the right thing to do.

    1. At least you are looking into different options so you have multiple things to help you pay for retirement. I think that’s the most important thing of all. 🙂

  2. I agree that the 3-legged stool doesn’t really exist that often anymore. There are barely any jobs with pensions to rely on and I feel like 401(k)s really fall more under the employee contributions. I do think that building up as many streams of passive income as you can is one of the best ways to fund your retirement. Easier said than done though, right?

  3. At most our stool has maybe 1.5 legs at the moment. We are trying to pay down debt and build up savings, but it is definitely a struggle. Hopefully our rental property will eventually start paying for itself and give us a financial leg to lean on.

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