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If you’re lucky enough to have a pension, you’re already ahead in the retirement game. But while pensions offer the rare promise of guaranteed income, they shouldn’t be your only plan. Experts say that relying too heavily on a pension could leave you vulnerable to inflation, tax surprises, or unforeseen medical expenses.
Here’s how to make your pension part of a complete, comfortable retirement strategy.
Key Takeaways
- A pension is a strong foundation, but not a full retirement plan; layer in Social Security, investments, and liquid savings.
- Pensions are still common in government, education, and the military, but they may not include Social Security benefits.
- Test your retirement plan against inflation, health costs, and lifestyle goals to make sure it’s sustainable, and watch for tax surprises, using tools like Roth accounts and HSAs to add flexibility.
1. Understand Your Needs and Know Your Payout Options
Before deciding if your pension is enough, you need a clear picture of your future expenses. That includes your basic living costs, taxes, healthcare, travel, and a cushion for unexpected expenses.
“Start by looking at projected needs: What will you need for all of your spending, taxes, and safety buffer in retirement?” says Justin Pritchard, founder of Approach Financial. Then, you’ll have a better idea of how the cash flows from a pension can help supplement those needs.
It’s also important to understand that pensions don’t come with a one-size-fits-all payout. You may be offered multiple options, including monthly payments or, in some cases, a lump-sum distribution that can be rolled into an individual retirement account (IRA). Of course, a monthly payment provides you with regular income, but a lump-sum withdrawal gives you the opportunity to invest the money on your own, only at the risk of investment losses or spending your funds too quickly.
Don’t forget to look at whether your pension includes cost-of-living adjustments (COLAs), which help offset inflation. If not, you’ll gradually lose purchasing power over time.
Who Gets a Pension?
While pensions are also available in the private sector, they’re most common in public service roles. Think police, teachers, firefighters, federal employees, and military retirees.
2. Factor in All Your Income Streams
Your pension is likely just one leg of the stool. Social Security, retirement accounts, and other investments can all play a role. Pritchard says some people receive generous pensions, especially if they had high earnings or worked for the same employer for decades, but that’s not always the case.
Leyder Murillo, founder of Wolfpack Wealth Management, emphasizes coordinating with Social Security, tax-advantaged accounts like Health Savings Accounts (HSAs), and Roth IRAs. “A pension provides a great foundation, but the full retirement plan should still be diversified across income sources and remain flexible enough to adapt to life’s inevitable surprises,” he says.
For example, Pritchard advises maintaining a cash cushion for one-time expenses like a new car or home repairs—just in case anything unexpected happens.
3. Watch Out for Tax Traps
As with any good retirement plan, long-term tax planning is essential. Pensions are typically taxed at ordinary income rates. If you’re not careful, that could push you into a higher bracket, especially when combined with other income. Murillo warns, “Some clients either underestimate their tax liability or don’t withhold enough.”
Pritchard also notes that if you have money in pretax retirement accounts, you’ll eventually need to take required minimum distributions (RMDs) in your 70s—another income source that could push you into a higher tax bracket. Spending down pretax balances or doing Roth conversions when your income is low can help you manage your taxes, he adds. And if you do face an unexpected tax bill, tapping into tax-free Roth assets is a smart way to bridge the gap.
4. Stress-Test Your Retirement Lifestyle
It’s easy to assume a pension means automatic security. But not all pensions are inflation-adjusted, and your spending may rise in retirement. “Some clients assume they’ll spend significantly less in retirement—but that’s not always the case,” Murillo says. “A client who wants to travel the world in retirement may face expenses that far outpace standard inflation and aren’t covered by modest annual COLA increases.”
Stress-test different scenarios and build in flexibility for big-ticket items like healthcare, home repairs, or family support.
The Bottom Line
A pension is an enviable advantage in retirement planning—but it isn’t everything. To retire comfortably, you need a strategy that layers in other income, anticipates tax consequences, and adapts to your real lifestyle goals. Ultimately, the question isn’t just whether a pension covers your bills—it’s whether it supports the life you want to live.
