I just got off a call with someone who had a common concern—one I’ve heard many times before. They were getting ready to retire and had a pension, but they weren’t sure how it fit into the bigger picture. How does a pension change the way you invest? How does it impact your overall retirement plan?
If you have a pension, your retirement strategy will look very different from someone who doesn’t. And that difference often starts with how we think about retirement in the first place.
It’s Not About Net Worth—It’s About Cash Flow
When people think about retirement, they often think in terms of hitting a number—$1 million, $2 million, maybe more. But here’s the problem: Net worth alone doesn’t pay the bills. Retirement isn’t about building up the biggest number. It’s about creating enough income to support your lifestyle.
Let’s say you have $1 million in your portfolio. That doesn’t mean you can spend $1 million in retirement. It means you can spend a percentage of it each year—typically 4% to 5%—which would give you about $40,000 to $50,000 annually.
That’s the number that really matters. Not the portfolio value itself, but the income it can safely generate.
Why a Pension Is Like a Hidden Portfolio
Now let’s say you’re someone who has a pension that pays $5,000 per month. That’s $60,000 per year of guaranteed income. Using the same 4% rule of thumb, you’d need a $1.5 million portfolio to generate that same income on your own.
In other words, your pension is effectively doing the work of a $1.5 million retirement account.
But here’s what trips people up: that $1.5 million doesn’t show up on your balance sheet. You won’t see it on your net worth statement. That makes it easy to overlook how valuable it really is.
Too many people get hung up on net worth—$2 million, $4 million, $10 million—but that only tells part of the story. I’ve seen plenty of “high net worth” situations where most of that money is tied up in real estate, second homes, or other illiquid assets that don’t generate cash flow.
Let’s take an extreme example. Imagine someone has a $10 million diamond. Sounds impressive. But that diamond doesn’t produce any income. You can’t shave off a piece of it to buy groceries. That’s not going to help you in retirement.
At the end of the day, what matters is this: Can your assets reliably create the income you need to live your life?
Three Retirement Scenarios with a Pension
Let’s walk through a few examples to see how a pension can change the retirement math.
Scenario 1: No Pension
You want to spend $80,000 per year in retirement. You and your spouse expect $30,000 from Social Security. That means you’ll need to generate the remaining $50,000 from your investments.
To do that sustainably, you’d likely need $1.25 million in your portfolio (based on a 4% withdrawal rate).
Scenario 2: Pension + Social Security
Now let’s say you still want to spend $80,000 per year. You receive $30,000 from Social Security and $20,000 from a pension. That’s $50,000 in guaranteed income. The gap you need to fill from your portfolio is just $30,000.
In this case, you might only need $600,000 to $750,000 saved to cover the shortfall—roughly half as much as someone without a pension.
Scenario 3: Full Pension + Social Security Coverage
Let’s say you receive $30,000 from Social Security and $50,000 from a pension. That adds up to the full $80,000 you need.
In this situation, you might not need to rely on your portfolio at all.
That’s the power of a pension: it can dramatically reduce how much you need to save, while still allowing you to maintain the same quality of life.
Two Important Nuances with Pensions
Before you get too comfortable, though, let’s talk about two key considerations when relying on a pension in retirement.
1. Cost-of-Living Adjustments (COLAs)
Some pensions increase with inflation. Many don’t. This matters because even if your pension covers all your expenses today, it may not in the future.
Let’s go back to that $50,000 pension. If inflation is 3% per year, your $80,000 target spending becomes $82,400 the next year. If your pension doesn’t keep up, you’ll need to cover that growing gap from somewhere—likely your savings.
In general, government pensions are more likely to have COLAs. Private pensions often do not. Either way, it’s critical to know how your specific pension works so you can plan accordingly.
2. Survivorship Options
If you’re married and have a pension, what happens to that income if you pass away?
With retirement accounts like a 401(k) or IRA, the money can be passed on to your spouse. But pensions are different. You usually have to make a choice at the time you begin benefits:
- Single life: Higher monthly income, but payments stop when you die.
- Joint and survivor: Lower monthly income, but your spouse continues receiving benefits after you pass away.
There are variations (100%, 75%, or 50% survivor benefits), and it’s important to choose carefully. Taking the higher single life payout might seem appealing, but if your spouse outlives you by 10, 20, or even 30 years, that decision could leave them in a difficult position.
A good rule of thumb: if you’re going to take the single life option, make sure your portfolio or other assets can still provide for your spouse in the event of your death.
How to Invest When You Have a Pension
So how should you invest if your pension covers most (or all) of your retirement income?
This is where it becomes highly personal. In many cases, people default to conservative investments in retirement—often because they’re drawing down from those accounts to meet income needs.
But if you don’t need income from your portfolio, that changes the equation.
You may be able to take on more risk and invest more aggressively—because you can ride out market volatility without needing to sell. That could give you better long-term growth potential.
Or you may decide to stay more conservative—not because you need to, but because that’s what feels right to you. The beauty of a strong pension is that it gives you flexibility. You can choose an investment strategy that fits your goals and risk tolerance, rather than being boxed in by cash flow needs.
It also opens up options for how you use your portfolio: legacy planning, charitable giving, future healthcare costs, long-term care, or even funding big life goals like travel or family support.
Final Thoughts
If you have a pension, you’re in a unique and powerful position. It may not show up on a spreadsheet, but it’s one of the most valuable tools in your retirement plan.
The key is to think in terms of income, not just net worth.
Once you understand what your pension provides—and how it affects your broader strategy—you can build a plan that fits your life, your goals, and your values.
And if you’d like help putting all the pieces together, that’s exactly what we do at Root Financial. Every day, we help people just like you make sense of their retirement and create a plan to live the life they want. Schedule a call with one of our team members to see if we’re a fit.
The information presented is for educational and informational purposes only and should not be construed as personalized investment or financial advice. The content discusses general retirement planning strategies and is not intended to recommend any specific course of action for any individual.
Social Security and pension claiming strategies involve a number of variables, including life expectancy, portfolio returns, tax considerations, and personal circumstances. Decisions regarding Social Security benefits should be made in consultation with your financial advisor, taking into account your full financial picture.
Examples provided are hypothetical and for illustrative purposes only. They do not reflect any specific client situation and should not be relied upon for investment decision-making. Past performance of investments is not indicative of future results. All investing involves risk, including the potential loss of principal.
Root Financial Partners, LLC provides tax planning as part of its financial planning services. However, we do not provide tax preparation services, represent clients before the IRS, or offer legal advice.
Clients should consult their CPA or attorney before implementing any tax or legal strategies discussed. Nothing in this video should be interpreted as a recommendation to take a specific tax position or legal action.
This content may include discussions around advanced financial planning strategies such as Roth conversions, backdoor Roth IRAs, tax loss harvesting, charitable giving, estate planning tactics, or Social Security claiming strategies. These concepts are general in nature and are not personalized advice. Actions related to these strategies may trigger tax consequences or legal implications. Always consult with your CPA or attorney to assess suitability based on your personal financial circumstances.
Suitability for these strategies depends on your individual tax situation, income, age, investment profile, estate plan, and other factors. Actions related to these strategies may trigger tax consequences or legal implications. Always consult with your CPA or attorney to assess suitability based on your personal financial circumstances.