Why a Pension Changes the Way You Should Plan for Retirement

Are you planning to retire with a pension and want to make the most of it? Unlike 401(k)s or IRAs, pensions tout income for life. Knowing how to optimize your retirement benefits is crucial. Retirement planning goes beyond monthly checks.

Pension retirements are rare these days. How will you ensure stability, flexibility, and financial freedom? We’ll cover what most people don’t know about retiring with a pension.

A Quick History About Pensions and Why Yours Matters

Back in the early 1980s, about 60% of private sector workers had access to a defined benefit pension plan. This was the kind of plan where you worked for a company for 30 years, and they sent you a check every month in retirement. 

Fast forward to 2022, and that number has dropped to about 15%, according to the Bureau of Labor Statistics. If you’re retiring with a pension today, you’re one of the few. But having one doesn’t automatically mean financial security. To make the most of it, you’ll need to weigh options about timing, taxes, survivor benefits, and risk.

The First Big Choice is Choosing a Lump Sum Versus Monthly Annuity Payments 

When retiring with a pension, the biggest decision is often whether to take your benefit as a lump sum payout or as a monthly annuity payment for life. Some pensions offer a choice. Each option has pros and cons. A true fiduciary will help weigh both options. 

Lump Sum Payout

With a lump sum, you get your pension benefit in one large payment upfront. After that, it’s up to you to invest, manage, and spend it.

A lump sum can make sense if:

• You have health issues and may not live long enough to benefit from years of payments.
• You want more flexibility to use or invest your money however you see fit.
• You want to leave more behind for heirs.
  

Once you take the lump sum, the responsibility shifts to you. If you overspend or your investments don’t perform well, the money could run out.

Annuity Payments

Annuity payments provide reliable income for life. This steady paycheck-style income often feels more valuable than a lump sum, especially if you already have other savings or investments to cover extra expenses.

But pensions don’t adjust to your changing needs. If your spending goes up, maybe from healthcare costs or a home project, your payment won’t increase to match. And unless you select a survivor benefit, the income ends when you pass.

Company Health and PBGC Coverage

Pension retirements are based on a defined benefit plan. Another factor to consider is whether your employer will be financially stable enough to pay your pension long-term. Private pensions are sometimes backed by the Pension Benefit Guaranty Corporation (PBGC), which steps in if a company goes bankrupt. However, PBGC typically only covers a portion of promised benefits, not the full amount.

If you’re unsure about your company’s stability, or if you’re an executive with access to financial insights, taking a lump sum may reduce the risk of losing benefits down the road.

SEE ALSO: The 5 Mistakes That Can Destroy Your Retirement Plans

Understanding Your Pension Annuity Options

If you choose annuity payments, your pension plan may offer several variations. Here’s what they mean and who they fit best.

Single Life Annuity

This option gives you the highest payout because it only covers your lifetime. Payments stop when you pass away. It’s often best if you’re single, your spouse is financially independent, or you’re in a second marriage where your partner doesn’t rely on your pension.

Single Life Annuity With a Certain Term

This version guarantees payments for a set period, like 10 or 15 years. If you start at 65 and pass at 70 with a 15-year term, your beneficiaries would continue receiving payments for 10 more years. It’s useful if you have children, non-married partners, or a life partner not covered by traditional survivor options.

Joint Survivor Options (50%, 75%, 100%)

These options continue payments to your spouse after you die, at the percentage you choose. The higher the survivor benefit, the lower your monthly payout while you’re both alive. A 100% option reduces your income the most, but it gives your spouse full protection if you pass first.

No matter which annuity option you look at, the key is balance. A single life annuity gives you more money now, but stops when you pass. Adding a certain term or survivor benefit lowers today’s paycheck, but it creates security for the people you leave behind. There’s no perfect answer, only the option that best fits your life, your health, and your family.

The Hidden Blind Spots in Pension Planning

While pensions provide consistent income, they don’t offer much in the way of flexibility. If healthcare costs rise or you want to fund a major home repair, you can’t increase your pension payment. That’s why having other sources of savings is crucial.

The Timing Gap

Many pensions don’t start right when you retire. For example, you can retire at 60 and your pension begins at 65. This creates a gap that you’ll want to take care of. Planning ahead ensures smooth transitions during gaps. Here are a few options to consider. 

• Drawing from personal savings or a brokerage account.
• Using Roth accounts for tax-advantaged withdrawals.
• Taking part-time work to cover short-term needs.

Planning for this gap ahead of time helps you avoid tapping Social Security early or draining your retirement accounts too quickly.

SEE ALSO: Hidden Retirement Traps That No One Warns You About

Taxes and Pensions — Why It’s Not Just About Income

Your pension payments are counted as taxable income, and when you add withdrawals from retirement accounts and Social Security, it’s easy to climb into higher brackets. Think of your savings as sitting in three different buckets: traditional accounts, Roth accounts, and taxable accounts.

Each one is taxed differently, and the mix you choose can make a huge difference in how much you keep over a lifetime. Most pensions don’t include a cost-of-living adjustment. 

Bucket 1: Traditional 401(k) or IRA

• Funded pre-tax.
• Everything you take out in retirement is taxed as ordinary income.
• That’s why combining it with pension + Social Security can push you into higher brackets.

Bucket 2: Roth 401(k) or Roth IRA

• Funded with after-tax dollars.
• Withdrawals in retirement are tax-free.
• Helps keep you in a lower tax bracket when combined with your pension.

Bucket 3: Taxable (brokerage/joint/individual account)

• Funded with money you’ve already paid tax on.
• Only dividends, interest, and gains get taxed.
• Adds flexibility because you can time when you sell investments.

Building a Smarter Pension Strategy

A pension is a strong income component, but it isn’t a complete retirement plan on its own. To make it last, you need to layer in flexibility, survivor protections, and smart tax planning.

One of the biggest levers you control is how you save outside your pension. Relying only on pre-tax accounts, like a traditional 401(k) or IRA, can lead to higher tax bills once pension and Social Security income kick in. That’s where a mix of accounts can help.

By spreading savings across traditional, Roth, and taxable accounts, you give yourself more options. You can pull from different “buckets” depending on your needs in a given year. That mix helps you:

• Keep taxable income steadier instead of spiking into higher brackets.
• Cover big one-time expenses, like healthcare or home projects, without draining pre-tax accounts.
• Build long-term flexibility so your retirement plan adapts as life changes.
  

The exact mix will look different for everyone, but the principle stays the same: diversifying how you save gives you more control over how you spend.

Key Takeaways for Pension Planning

• Mix traditional, Roth, and taxable accounts instead of putting everything in one place.
• Plan for the timing gap. If your pension doesn’t start right when you retire, build a bridge with savings or part-time work.
• Protect your spouse. Survivor benefits can mean a slightly smaller paycheck now, but they add security for later.
• Pensions are fixed, so use other accounts for healthcare costs, home projects, or one-time expenses.
• Your tax mix can change your lifetime bill by hundreds of thousands of dollars.

Ready to Make The Most of Your Pension? 

Retiring with a pension gives you something many people no longer have – a steady income for life. But a pension alone isn’t enough. The choices you make now will shape your financial future.

Start planning today with a retirement strategy that fits your life and goals. The right guidance can make all the difference. Contact Paces Ferry Wealth Advisors to schedule a call. 

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.