Ready For Retirement
Ready For Retirement
Retiring With a Pension? Here’s How It Changes Everything About Your Retirement Math
Retiring with a pension changes everything about your retirement math.
Most people think about retirement in terms of net worth—how close they are to a million, two million, or more. But if you have a pension, that old framework can send you down the wrong path. In this episode, James explains why retirees with pensions need to think in terms of cash flow, not balances on a statement.
James begins with a simple shift: a pension that pays $60,000 a year acts like the income from a $1.5 million portfolio under a traditional 4% withdrawal rule. That perspective alone can reduce the pressure many people feel when they compare their savings to generic benchmarks or to friends who rely entirely on investments.
He then walks through real scenarios—showing how a couple aiming to spend $80,000 per year may only need $600,000–$750,000 in savings if pension and Social Security cover the first half of their income needs. And in cases where the pension plus Social Security fully replaces spending, a retiree might not technically need any portfolio withdrawals at all. Cash flow drives the plan; the portfolio simply becomes optional support.
James also covers the nuances most retirees overlook:
• How to plan for pensions without cost-of-living adjustments
• Why survivorship options can make or break a spouse’s long-term security
• How investment strategy changes when you don’t need to pull from your portfolio
• Why being 60 or 65 doesn’t automatically mean you need a conservative allocation
Retirees with pensions often have far more flexibility than they realize. The key is understanding how the pension slots into the income puzzle, how it affects withdrawal rates, and how it should guide investment decisions—especially for couples.
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The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
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I just got off a call where I was talking to someone who was really concerned about their retirement because they have a pension and they have no idea how that's supposed to change the way they invest, and more importantly, the way they plan for retirement. So if you are watching this and you have a pension, the way you structure your retirement and think about your investments is gonna be significantly different than the person who does not have a pension and the way they think about theirs. Here's the reality of the situation. When you think about retirement, we typically think about a number. I need to save X number of dollars, I need to hit a million or two million or whatever that number might be for you. That's the traditional way of thinking about this. And there's some truth to that. But here's where that falls short. We're not just chasing a net worth because that net worth by itself does not necessarily guarantee us what we actually need. What we actually need in retirement isn't net worth, it's income. Here's a practical example. When someone talks about saying, oh, I have a million dollars in my portfolio, what does that actually mean? Well, it doesn't mean that they're gonna spend a million dollars per year, of course. No. What it means is there's some portion of that number that they can live on. What we really need to do is mentally account for what that million dollars translate to when it comes to cash flow. Because in retirement, it's your cash flow that you care about, it's your income that you care about, not the portfolio value, not the net worth. So if you have a million dollars, general rule of thumb might say you can take four to five percent per year of that portfolio. Four to five percent of the portfolio means$40,000 to$50,000 if your portfolio value is$1 million. So don't just look at the net worth, it's the$40,000 to$50,000 that you actually should think about. So that individual has a pension. If you're sitting here saying, man, I don't have a million dollars, I don't have two million dollars, or maybe you do, but you also have a pension. Here's how you should think about your pension. If you have a pension coming in and that pension is$5,000 per month, well, that's$60,000 per year. If I were to use the general 4% framework, that's$60,000 per year of pension income, it would take a$1.5 million portfolio to create that same level of income using standard 4% withdrawal rates. So here's the perspective shift. If you have a pension, that's wonderful. And when you think about retirement, think of cash flow, don't think of net worth. Your net worth, I've seen far too many people fall into the trap of saying, I'm retiring and I have a net worth of$4 million. Well, that sounds really good. You should be able to create a pretty strong retirement, you would think, with a$4 million net worth. But then we look at that net worth and it's okay, well, two and a half million of it is in a primary residence, a million of it is in another property that's a second home. There's only$500,000 that's actually liquid. That full$4 million is not generating cash flow for you. It's the portion that's liquid, it's the portion that's your actual retirement account that does create cash flow. Now, if that property was a rental property, that'd be a different story. But what we care about is cash flow. And to use just an extreme example to finally illustrate this, let's assume you had a$10 million net worth. The entirety of it wasn't a very precious diamond, a very rare diamond. How valuable is that to you? It's cool to say, it's cool to have, it's cool to have that and say I have a$10 million diamond, but it does you zero practical good when you retire. You can't shave off pieces of this diamond to use it to redeem for cash to go pay for groceries and travel and other expenses. That's it. It's illiquid, it's not doing anything for you. So cash flow is the name of the game. A pension is not going to show up in your net worth statement. You're not gonna look at your balance sheet and see 401k, bank accounts, property, and then pension, but your pension is just as valuable as some of those pieces. So let's quickly go through how you should incorporate your pension and your overall financial strategy, and then how does that change how you should invest? And then there are a few nuances, a few key nuances that you need to understand if you're gonna use your pension as your sole income source in retirement. These are really important things to know if you want to avoid being in a bad spot in the future because you did not take care of a couple of these things or didn't think through a couple of these things. So going to the pension framework, how should you think about this? Well, when you think about your retirement, what you should always start with is what do you want to spend? Let's assume you want to spend$80,000 per year throughout retirement. Well,$80,000 per year, where you might initially go is geez, well, if I need to take 4% per year of my portfolio,$80,000 represents 4% of a$2 million portfolio. Do I need$2 million in my portfolio to live on$80,000 per year? No. And here's why. Most of you, even those of you who don't have a pension, are probably going to have Social Security. Let's assume that you and a spouse have combined$30,000 in Social Security benefits. So$80,000, keep in mind is what you want to live on.$30,000 of that is coming from Social Security before you even dip into your investments. So it's really just the remaining$50,000 that you need to spend. So if that was all you had was Social Security and investments, that$50,000 all needs to come from your portfolio. So depending upon the withdrawal rate that you're using, that's probably one to one and a quarter million dollars that you need in your portfolio to be able to spend$80,000 per year. Now let's use that same example, carry it over here, and now assume you have a pension.$80,000 is what you want to spend.$30,000 is coming in from Social Security. Let's assume another$20,000 is coming in from pension. So$50,000 here is coming from non-portfolio income sources, your pension, your social security. It's that$30,000 gap, that$30,000 difference that does need to come from your portfolio. So what do you do there? Well, if you need to create$30,000 per year and you're using a 4% to 5% withdrawal rate, you're going to need somewhere between a$600,000 and$750,000 portfolio value today so that you could create$30,000 per year, adjusted for inflation over the duration of your retirement, assuming a standard 30-year retirement. So what you can see here is that pension meant that this individual over here needed a portfolio almost half the size of the person over here. Now let's use one final example to really drive this home. You want to spend$80,000 per year, you and a spouse have$30,000 per year coming in from Social Security, and you have$50,000 per year pension. Now all of a sudden, you have$80,000 per year coming in that's fully meeting your expenses. You theoretically don't need any money in your portfolio, and you could still be just fine. So this is the single biggest way that pensions impact your retirement is people think in terms of portfolio values when they should be thinking in terms of cash flow. I don't care if your next dollar is coming from a pension or an IRA withdrawal, a dollar is a dollar is a dollar, and they're both going to do the same thing for you. So all else being equal, the higher your monthly pension amount, the lower amount you need in your portfolio to maintain the same standard of living. So much so that in some cases, people very strong pensions, especially if it's two spouses with the pensions, don't technically need any money in a portfolio to be able to retire and be in a very secure spot. Now, here's where people could get hung up with this. Number one, do you have a cost of living adjustment on your pension? So if we go back to that example, if you want to spend 80,000, Social Security is 30,000 per year. That's going to keep up with inflation. The 80,000 is certainly going to go up with inflation because you want to keep making sure that your purchasing power keeps up with inflation. But what if that 50,000 per year from your pension doesn't keep up with inflation? Typically government pensions will have cost of living adjustments, and typically private pensions do not. This is not a universal rule. This is just more common in each of these. So if you don't have a cost of living adjustment, well, year one, you're fine. 50,000 from pension, 30,000 from Social Security covers everything. But year number two, if inflation goes up by 3%, it's not 80,000 per year that you need to live on. It's about 82,400 that you need to live on. Well, now there's a little bit of a gap. And then the following year, there's a bigger gap and a bigger gap and a bigger gap. And yes, Social Security is increasing with inflation, but your pension isn't. So in that case, even though it might seem like you're good year one, you need to plan for what's that gap going to do over time and how do you save in your portfolio or savings account, or how do you offset the impact of that by using various other sources? The second thing you need to understand about retiring with a pension is you need to understand the survivorship options. If I have a 401k, for example, that my spouse and I are living on a retirement and I pass away, she's going to inherit the entire value of that 401k. So whatever income it was creating, she can continue creating that on her own. If I have a pension, though, that's not necessarily the case. When you have a pension, typically you're going to be able to elect different options. Do I want to take a lifetime pension, which is going to be a higher number, but that pension only lasts for as long as I live? Or do I want to take what's called a joint and survivor option? If I accept a lower amount from the pension, but if I pre-decease my spouse, that income continues over the course of her lifetime too. This is a very important, an extremely important planning point to planning decision, because some people are tempted to say, well, you know what? I'm going to take the higher amount. I want more money so that while we're both living, my spouse and I can both enjoy it. What happens if that spouse passes away a year into retirement, two years into retirement, and their spouse has another 20, 30 years to live after that? Where's that money going to come from? If you're not carefully planning for this, you could be in a world of trouble. So a couple planning points. Do you make sure that you're building up a portfolio so that you can take that single life option? And if something happens to you, your spouse still has portfolio to live on? Or do you consider taking the joint and survivor benefit? By the way, the joint and survivor benefit could be 100% joint and survivor, 75%, 50%. There's different options, and all of them are very important to plan through to say, how do we make sure that you're maximizing your income while the two of you are alive, if you're married, and the surviving spouse is also taken care of when the first spouse passes away. And then the third nuance to take into account here is what do you do with your investments? How do you invest differently when you have a pension that covers most or all of your actual income needs? Well, this is where it very much becomes a personal preference. Going back to the purpose of investments, the purpose of investments is to meet your income needs. So if you don't need any income from the investment, then it goes down to how can you be invested? Well, people are typically retiring in their mid-60s. And in their mid-60s, they're thinking, well, I should be kind of moderate or kind of conservative in my investment portfolio. But that's not because you're 60 or 65 that that's the case. It's because typically people at that age start needing to pull from their portfolio. And if you need to pull from your portfolio, you need to have at least a portion of that that is more secure, that is more stable, that is more protected from the ups and downs of the market. So if that's not the case, if you don't actually need anything from your portfolio, you can throw out some of those traditional rules. You could afford to be invested a lot more aggressively if you are more comfortable with that. What does that mean? Well, markets go up and markets go down. So you're going to experience more of those ups and downs in your portfolio. But if you can think to yourself and understand, I don't need this money, so I can accept that I'm okay with that, you're going to have longer-term growth potential. No guarantee, but much better growth potential. Or you might think, you know what? I know I could grow more, but I'm just not personally comfortable with that. Maybe you still are a bit more moderate or have a bit more of conservative investments in there. Not because you need to, but because it fits with your risk tolerance. It fits with your comfort level around investing. So that's where you have a lot more freedom and flexibility to do what makes sense for you. You're not as restrictive as what you can do with your investments because you need a certain amount to be conservative and need a certain amount to be more aggressive. So don't just think that because you're 65, you should invest like all other 65-year-olds do if you have a pension. You should think very clearly about how does this play into my overall plan? Is this money I want to use to spend more in the future? Is this legacy money? Is this money I'm going to set aside for a long-term care event if and when it happens? Depending on what your answer is, you should think about investing that money differently. But if you have a pension and you're retiring, that pension can be a wonderful tool to unlock a whole lot of what you're doing. Think of that pension and think of retirement in terms of cash flow, not in terms of net worth. And once you understand how this changes your plan, you can optimize a retirement that works best for you.
