Jan 6, 2025
Is the classic retirement model dead? This model relies on what’s often referred to as the “three-legged stool,” which is comprised of workplace pensions, Social Security retirement benefits and personal savings. For many Americans, however, that stool is becoming awfully wobbly.
For one self-made millionaire who retired at the age of 34, his advice is simple: “You just have to count on yourself.” Sam Dogen, now 47, is founder of personal finance site Financial Samurai and author of “Millionaire Milestones.”
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“You’re unlikely to be able to count on a pension. And you can’t count on Social Security. If it’s there — and it should be there — you can treat it as a bonus,” he told CNBC Make It.
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Decline of the traditional pension and Social Security concerns
Employers might offer a defined-benefit (DB) plan and/or a defined-contribution (DC) plan. With a DB plan (what we often think of as a traditional workplace pension), you’d receive a monthly payment in retirement based on factors such as length of service and average salary. With a DC plan, you contribute a portion of your wages into a retirement account such as a 401(k), 403(b) or 457(b).
“Access to DC plans has increased across worker groups over the past several decades, while access to DB plans has decreased,” according to a recent report by the Congressional Research Service (CRS). While 86% of public sector workers have access to a DB plan, only 15% of private sector workers do.
Some experts argue DC plans replacing DB plans shifts the risks and responsibilities of growing a long-lasting portfolio to the workers.
Also consider the growing number of Americans who are part of the gig economy, with no access to DB or DC plans. At least 41 million people in the U.S. take part in some form of gig work, according to the Gig Economy Data Hub. More than one in 10 gig workers, or nearly 17 million Americans, rely on these gigs, including temp agency work, on-call work, contracted work, and freelancing, to make a living.
If they can’t rely on a traditional workplace pension, then they may be relying on Social Security instead. Indeed, a Bankrate survey found that just over half (53%) of Americans who haven't retired yet expect to pay for retirement expenses with their Social Security benefit. However, seeing as the Social Security trust fund is expected to run out in 2035, you may not want to put all your eggs in that one basket. While your benefit won’t disappear, it could be substantially reduced.
Here’s how Dogen says he ditched the daily grind and retired early with this new three-legged stool:
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Tax-advantaged savings
Tax-advantaged retirement vehicles, such as 401(k)s and Roth IRAs, are an essential tool for retirement savers and the first thing you should aim to do is maxing them out, said Dogen.
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If your employer offers matching contributions, then it’s worth contributing enough to get the full match each year since it’s like getting free money. Plus, you’ll get a tax break when you make contributions or when you withdraw them in retirement, depending on the type of retirement savings account. While you usually can’t withdraw this money before you turn 59 ½ — not without a stiff penalty, anyway — that could be a good thing, since you’ll benefit from the power of compounding (and won’t be tempted to spend it elsewhere).
In 2025, individuals can contribute up to $23,500 to their 401(k) plan, a slight increase from $23,000 for 2024, while the limit on annual IRA contributions remains $7,000. The limits are higher for Americans aged 50 and older, and starting in 2025 those aged 60 to 63 are allowed a “super” catch-up 401(k) contribution of up to $11,250.
Taxable investments
The next step, Dogen says, is building your own portfolio of taxable investments as much as possible to accumulate wealth. He says you should aim for your taxable investments to double or triple your retirement accounts in value by the time you’re 60.
That might mean opening a brokerage account, where you can buy and sell securities such as stocks, bonds and exchange-traded funds (ETF). You can also invest in alternative assets such as real estate, farmland, commodities or collectibles. The downside? Any profit you earn will be subject to capital gains tax. The upside? This money isn’t tied up until retirement, giving you more flexibility — and you could bring in additional income, say, through stock dividends or rental income.
X factor to generate more income
“You want to be working on something, either before or after work, that can eventually generate income,” said Dogen, who calls this an “X factor.” “It can be a side hustle. Or everyone has a skill — you can teach that skill to other people.”
This extra money could be used to beef up your contributions to taxable investments and retirement savings — and it could even open the door to new opportunities. Doing something that involves a skill set you possess or a hobby you’re passionate about could make a side hustle feel less like a hustle, bringing you more financial security and personal satisfaction. “Because you’re doing something you enjoy, you become an expert at it, and it’s fulfilling,” he said.
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Vawn Himmelsbach is a veteran journalist who covers tech, business, finance and travel. Her work has been featured in publications such as The Globe and Mail, Toronto Star, National Post, CBC News, Yahoo Finance, MSN, CAA Magazine, Travelweek, Explore Magazine and Consumer Reports.
