If you are one of the fortunate Americans with a defined benefit pension plan, how should you think about saving for retirement?

How certain is your pension?

Will your pension still be there when you retire? Nearly one million Americans are currently receiving income from the PBGC, or Pension Benefit Guaranty Corporation, because they were enrolled in one of over 5,000 failed pension plans. It is not very uncommon for a pension plan to fail, but fortunately the PBGC covers most plans. They do not cover government pensions, military pensions, those associated with religious institutions, or small professional practices with less than 25 employees. While government pension plans aren’t covered by the PBGC, they are generally considered low-risk since governments can raise taxes to overcome a funding shortfall. Private companies don’t have this luxury.

If you have a government pension, it is worth reading up on the federal or state laws that apply to your pension and outline what steps will be taken if there is a funding shortfall. In general, most pension plans can be considered safe, but it is important to understand the protections in place if something were to happen to your own pension plan.

How much should you invest outside of your pension?

How much money should you invest for retirement if you expect to receive a pension? Before you completely factor your pension into your retirement need, make sure you will absolutely be eligible to receive your pension payments. There may be service requirements you need to meet before becoming eligible, so if there’s a chance you will leave your job before you meet the service requirements, it may be best not to count that pension just yet.

If you are certain you are eligible to receive benefits in retirement, how do you determine what you should invest outside of your pension? There are many factors involved, but at the end of the day, it is a simple math equation. If you reduce your expected retirement expenses by a conservative estimate of your pension income, you can calculate how much you need to invest to fund that goal.

If that sounds complicated, don’t worry! We created our Know Your Number course to help you determine your retirement number and how much you should be investing to reach that goal. The course includes a nifty spreadsheet where you can adjust different variables like your expected expenses in retirement, age at retirement, life expectancy, and more to see if you are on-track to meet your retirement goals. 

How to think about investment allocation

If a pension plan is a safe investment that provides a certain amount of income in retirement, does that mean I can be riskier with my other investments? Not necessarily. There is no one-size-fits-all answer to risk in your investment portfolio. Everyone has different goals and risk tolerance that factor into how aggressive or conservative you may want to invest. In general, if you have a very large and safe pension plan, you may be able to invest more aggressively in other retirement accounts. If your pension plan is smaller and not as safe, it may be unwise to invest so aggressively in outside accounts.

What if something happens after you retire?

After you retire and start receiving income from your pension plan, you may feel like you’re in the clear. However, something could happen to your company after you retire that may affect your pension plan, like bankruptcy or underfunding. Most private pensions are covered by PBGC insurance, which would cover your pension income up to legal limits if something happened to your plan. It is important to research whether or not your pension plan is covered by PBGC and what would happen if your company went bankrupt or could no longer fund the plan.

What about your loved ones?

If both you and your spouse are dependent on your pension income, they could be in quite the pickle if you were to die before them. That’s why it’s so important to understand survivorship options available in your pension plan. Many plans have the option to choose a joint or survivor option, which will likely decrease your monthly benefit, but would provide income for the life of both you and your spouse. Without this option, your pension income would stop when you died, which could be very bad for a spouse that depends on that income to live.

Pension plans have become more uncommon in the US, but there are still tens of millions of Americans that will likely receive pension income in retirement. They are very different from 401(k) plans, and knowing whether or not you can depend on your plan, how much to invest outside your pension, and how to change your investment allocation, if at all, can help you reach your more beautiful tomorrow in retirement.

Some government employees are able to contribute to a pension that is matched by the government in lieu of Social Security. How should you think about your pension contributions when determining your savings rate? Want to know what to do with your next dollar? You need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.

If you are under the age of 40, you might find it difficult to believe that pensions were previously the dominant retirement plan in America. They outnumbered defined contribution plans, like 401(k)s, by a ratio of over 2:1. Today, they are not nearly as popular, and there are less than 10,000 pension plans with 100 or more participants.

Still, pension plans aren’t going anywhere anytime soon. 21% of Americans have pension plans, and 83% of state and local government employees working full-time participate in a pension plan.

How much should I save if I have a pension?

One of the most difficult questions to answer is how much you should be investing for retirement outside of your pension plan. To start, if you don’t already know, find out how much both you and your employer are contributing to your pension. You may always include your own pension contributions in your savings rate, and can include employer contributions in your savings rate if you make under $100,000/single or $200,000/married.

Here’s an example: Jill is single and is required to contribute 5% of her annual pay to her pension, and her employer contributes another 5%. If Jill makes under $100,000, her savings rate would be 10%. If she makes over $100,000, her savings rate would be 5%.

That might give you an idea of what you should be aiming to save outside of your pension, but depending on your retirement goals, age, and how far ahead or behind the curve you are, you may need to save more or less. Our Know Your Number course can be a great tool for factoring a pension into your retirement number. I’ll show you how it works.

First, let’s look at someone without a pension. They are age 30 and want to retire at 55. They expect to spend $6,000 per month in retirement, using today’s dollars (pre-inflation adjustment), already have $200,000 invested, and invest $30,000 per year. They are currently on-track to meet their goal to retire at 55, based on their assumptions.

Now, what if they had a pension? Let’s assume they have a PBGC insured pension, and they will conservatively receive $2,200 per month starting at age 50 (which means they will more than likely receive more; it’s almost always better to be more conservative when it comes to estimating retirement needs). Here’s what their number looks like now with the same assumptions.

To account for the pension, expenses in retirement were reduced to $3,800. They are now able to retire just before age 50 based on the assumptions used. This means if they still would like to retire at age 55, they could save less per year or explore spending more in retirement (blossoming memories come to mind with travel and visiting family). Here’s what an updated calculation would look like.

To retire at age 55, with the assumptions chosen, they would need to invest just $11,500 annually outside of their pension plan. It’s incredible how such a “small” detail can significantly impact your retirement plan and how much you need to be investing. Investing 20% to 25% is a great place to start, but knowing your retirement number can help you know exactly how much you should be investing each month to be on-track to achieve your retirement goals.

What if I won’t get Social Security?

Some workers with pensions, including teachers in a handful of states, don’t pay Social Security taxes and won’t receive benefits unless they have enough credits from a different job. If you do have a pension and won’t be receiving Social Security benefits, consider including a much more conservative estimate of your pension in your retirement plan or not including it at all. It is not uncommon for teachers to transition to another school system or profession to build enough credits to qualify for Social Security after they meet the years of service requirement and their top three years of income are used in the pension calculation. A “best of all worlds” approach to optimize their retirement.

How does a pension affect my asset allocation?

A pension should not be viewed in isolation, but as part of your larger retirement plan and portfolio. Defined benefit pensions provide just that: a predetermined retirement benefit that doesn’t fluctuate with the stock market. Your pension can be viewed as a more conservative piece of your portfolio, which may allow you to take more risk with the rest of your portfolio.

Saving for retirement can seem more confusing when you have a pension plan, but it doesn’t have to be. Use our tools and resources to help you determine where your pension fits in your overall retirement portfolio and how it affects the other parts of your retirement plan. While you only have one retirement, our advisors have helped hundreds through the transition into retirement. If you would like to complete the Abundance Cycle to land the plane of your retirement journey, please do not hesitate to check out our “Work With Us” page at AboundWealth.com or MoneyGuy.com. Our ultimate goal is to help you live your best financial life so that your money works harder than you do with your back, brain, and hands.

In this highlight, Brian and Bo discuss how much you should be investing when you have a Pension.

Check out our Know Your Number course to help you on your wealth building journey!

Future income streams, such as defined benefit pension plans and social security, primarily impact your retirement planning by lowering your projected income needs in retirement.

These future income streams allow you to withdraw smaller amounts from your portfolio in retirement as a portion of your living expenses will be covered by your pension and/or social security. We would hate for retirement planning to be focused around a pension, then it not be available once you are at retirement age. For more information, check out this article “How to Save for Retirement When You Have a Pension.”

Learn more about pensions in this video:

Video: How Should You Factor a Pension Into the 25% Investing Rate?

Should you count your pension contributions towards your savings rate? In this highlight, we discuss what you should count in our 25% savings rate rule.