Retirement isn’t a finish line—it’s the beginning of your next chapter. For many retirees, a well-structured pension can be the cornerstone of financial security. But to truly leverage its full power, understanding how it fits into your broader retirement strategy is essential.
Here’s how to make your pension work smarter for you.
Why a Pension Still Matters
Pensions (defined benefit plans) may seem old school, but they remain a powerful tool. In 2023, 56% of U.S. retirees reported receiving income from a pension at some point in the past year. And retirees with pension income tend to fare significantly better: among those without labor income, 78% reported doing “at least okay” financially, compared to just 52% relying only on Social Security.
That stability is vital. Pensions offer a reliable income stream, often indexed to the cost of living, that complements Social Security and investments. It’s why financial experts refer to the “three-legged stool” of retirement: Social Security, pension, and personal savings.
Know Your Pension Benefit Options
Most pensions offer multiple payout methods:
- Life-only annuity: Highest monthly income but ends with you.
- Joint & survivor annuity: Lower monthly payments but continues for your spouse after you’re gone.
- Lump sum: One-time distribution that you can invest but carries risks (market performance, tax liabilities).
The choice comes down to your priorities and financial circumstances. If you’re concerned about legacy or guaranteed income, the annuity routes may offer more peace of mind. If you have significant other assets and investment savvy, a lump sum could give you flexibility, provided you work with a professional to avoid costly mistakes.
Seamlessly Integrate Your Pension into Your Plan
A pension is only as robust as its place in your overall plan. Here are steps to help ensure alignment:
- Determine Your Safe Withdrawal Rate. A pension reduces the pressure on your personal savings, which can allow for a more aggressive (or, conversely, more conservative) portfolio strategy. If your pension and Social Security cover, say, 60% of your expenses, you might withdraw less from your investments.
- Manage Taxes Strategically. Pension income is taxable as ordinary income. By planning the order in which you tap your other assets (Roth vs. traditional IRA, taxable accounts, etc.), you can often lower your tax burden. Longevity, combined income, and tax brackets all affect the strategy.
- Guard Against Inflation. Cost-of-living adjustments (COLAs) aren’t guaranteed. If your pension lacks a COLA, inflation could erode its value over time. Work with an advisor to ensure inflation protection through investments or other income sources.
- Align With Estate Goals. Some pension options terminate upon death; others provide survivor benefits. If legacy matters to you, consider selecting a payout option that aligns with your estate planning goals.
Understand the Big Picture
Pensions make up only one piece of your retirement puzzle, albeit a crucial one. Census-linked data shows that nearly 90% of retirees receive Social Security and 47% receive pension income. Together, these income streams cover about two-thirds of retiree income, providing a solid foundation, but leaving roughly one-third to be funded by savings, investments, or part-time work.
When to Seek Expert Guidance
Pension decisions aren’t one-size-fits-all. Consider consulting a professional if you’re facing:
- Multiple pension plans
- Complex survivor benefit options
- Non-standard features like lump sums or variable payouts
- Tax and withdrawal optimization questions
Indeed, many retirees recognize the difference that expert guidance makes; households with a written retirement strategy often cite professional advice as a cornerstone of their successful planning.
Final Thoughts
A pension is more than just a benefit; it’s a tool for security, legacy, and peace of mind. By understanding your payout options, integrating them into an overall plan, and ensuring protection against tax and inflation risks, you have a better chance of making your pension earn its keep well into your golden years.
At Legacy Wealth Management, we specialize in helping retirees turn complex benefits into clear, reliable income. We believe retirement isn’t about surviving but thriving—and your pension can be the foundation for that.
Ready to review your pension options or map out your income plan? Let’s set aside time to make sure your retirement income sources are stable, optimized, and aligned with your goals.
