If You Have a Pension, This Changes Retirement

Transcript

In retirement, income, or money coming in, usually comes from a mix of different sources. That might include Social Security, retirement accounts, investment accounts, annuities, or other assets. For some people, that mix also includes a pension. If you do have a pension, it changes how retirement income comes together, and today I want to show you what that looks like and why it matters.

When you're working, income is predictable. For most people, money shows up, bills get paid, there are fewer moving parts. But in retirement, income usually comes from more than one place instead of one paycheck. Depending on your situation, those sources can add up quickly and feel overwhelming. So how does it all come together? Before making decisions, it helps to clearly lay out what those income sources are and how they behave, and that's where we'll start.

Meet Jack. Jack is getting ready to retire at age 65. In retirement, Jack needs around $7,000 per month after tax to support the things he wants to do. It's our job to help map out how that income shows up in the most efficient way possible. On this screen we can see Jack's income picture. We have his salary listed, but we know that's turning off, he's retiring, so a paycheck is no longer coming in. He'll have Social Security coming in, and we're going to file at age 65 when he retires, so he'll receive $2,200 a month from Social Security right away. Jack also has a pension, and on a monthly basis it's around $1,800 a month. So all in all, this gives us two income sources bringing in around $4,000 a month.

The salary is going away, which leaves us with our first source, Social Security, and a second. He also has a portfolio that includes taxable and retirement accounts, plus some cash savings. Rather than breaking those apart, we'll group them together and call it the portfolio. So altogether, Jack has three sources: one is Social Security, two is the pension, and three is the portfolio, or investments.

Before we show how they work together, let's clarify what each one really is. Jack's pension is income he earned over many years of working. While he was employed, money went into a pension system on his behalf. In simple terms, the system provides a monthly payment for as long as the pension is in force. Social Security works in a similar way. You pay into a system during your working years and later receive a monthly benefit. Because of that similarity, we can group these two together, and I like to call this mailbox money. Mailbox money is income that shows up on a schedule and isn't tied to the market. It's always hitting the mailbox, regardless of what the market is doing. For Jack, Social Security fits here, and his pension fits here. Together, those two sources provide Jack with around $4,000 per month, which is just over half of what he needs, and that income comes in regardless of what the market is doing.

So out of Jack's three income sources, two of them are steady and predictable. That matters. It means a portion of Jack's income does not depend on portfolio withdrawals. Just the $3,000 difference needs to be covered by portfolio withdrawals, and this is where the structure of the plan starts to take shape. Jack's portfolio plays a different role. It helps fill the remaining income gap and provides flexibility in how and when money is pulled. Because Social Security and the pension cover a good chunk of the income, the portfolio doesn't need to carry the entire plan on its own. That affects how much Jack needs to withdraw and how the portfolio is positioned.

Here's the cash flow summary, which helps map out what this looks like on an annual basis. We'll just look at this year, 2026, for Jack. Here are our income inflows: Social Security and his pension, and there's the total annual amount, our mailbox money coming in every year. Here are the expenses: $7,000 a month times 12 is around $84,000 after tax. Here's the tax payment, and here's the difference. So we have our mailbox money, our floor income, coming in, here are the expenses, and here's the gap. Where do you think we derive that income from? You probably guessed it, the portfolio. So the first two are here, and this tells us what we'll most likely need to take out of the portfolio. If we look back at that one screen, we can see the same number. We take it out of the portfolio, and here's what the portfolio is returning. We can do this every year.

We can also use a visual to show what our sources are: income sources, Social Security, pension, and portfolio withdrawal, and see how they work in tandem year after year. It's good to recalibrate and make sure the portfolio can support the withdrawals needed above and beyond the floor income. We can take it a step further and look at withdrawal rates. You've probably heard of the 4% withdrawal rate rule. It's very personal. In Jack's case, 54% of his income is that mailbox money, $4,000 a month, stable, from Social Security and the pension, and that keeps the withdrawal rate lower out of the portfolio.

One thing I've noticed is that that floor income percentage is personal for many people. Honing in on what you prefer that stability number to be can really help your experience and your emotions in retirement. Some people don't mind a lower stability ratio for their income. Some want more mailbox money because it feels better. That psychological piece matters just as much as the math. Sure, nine times out of ten the better math play is less mailbox money, that's the risk-reward relationship, but on the flip side, if you just don't like withdrawing, maybe that's not the best approach.

So the bottom line is, if you have a pension, your retirement income should be organized with intention. It can really help your confidence and clarity in this next chapter. Thanks for being here. Until next time.

Hosted byNick GeorgeCFP®, ChFC®, CLU®, IWA™FounderView bio →

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