Transcription
If you have a pension coming in retirement, you've probably wondered whether you're saving too much or not nearly enough. And most of the generic advice out there, the save 15%, save 20%, max out every account, assumes you have no guaranteed income coming at all.
In this video, I'll show you how to size your savings around the income your pension actually guarantees, why some pensions are worth far more than people realize, and how to find the real number that applies to you instead of one built for someone without a pension.
Hey everyone, I'm David Cabaniss, certified financial planner and founder of Cabaniss Wealth Management. I help people make sense of decisions like the one we're covering today so they can move forward in their financial life with confidence, not just a guess.
So, once a pension enters the picture, I see people split into two very different camps. One camp stops saving almost entirely, assuming the pension will cover whatever's left. The other keeps saving aggressively as if the pension doesn't exist at all, chasing a number built for someone with no guaranteed income.
The under-savers risk is straightforward. They're trusting a single income source completely with no cushion if that pension is ever reduced, frozen, or restructured, and very little flexibility if their actual expenses end up higher than expected.
The over-savers risk is less obvious, but just as real. They've spent a decade sacrificing vacations, downsizing their lifestyle, and delaying things that mattered to them, chasing a balance that may never have they may never have needed in the first place, because the math never accounted for the income already guaranteed to arrive.
The right amount has nothing to do with either extreme. It comes from a much narrower question. How much income do your investments specifically need to replace once you know what your pension is already covering?
Answering that question starts with knowing what your pension is actually worth. And most people are radically off on that actual number. A pension never shows up as a number on an account statement, so it's really easy to undervalue. There's no balance to check, no app to open, just a monthly deposit that starts on some future date. And that absence of a visible number is exactly why most people underestimate what it's worth.
Here's the comparison that makes it concrete. Financial planners commonly use a 4% withdrawal rate as a rough guide for how much income an investment portfolio can safely produce each year without running out of money over a 30-year retirement. Run that math in reverse and every dollar of guaranteed annual income is roughly equivalent to $25 sitting in an investment account. A pension paying $3,000 a month is 36,000 a year, which means it takes the place of roughly $900,000 in investment. A pension paying $6,000 a month takes the place of close to $1.8 million in an investment.
That comparison alone usually surprises people, but it actually understates the real value because a pension carries features most investment portfolios don't replicate automatically.
The first is longevity protection. A pension keeps paying no matter how long you live. While a portfolio can be drawn down faster than expected if you live longer than planned or if the market underperforms in the wrong years.
The second is a survivor benefit. If your pension includes one, meaning a spouse keeps receiving income after you're gone. That survivor benefit is worth pausing on because most people don't think through what it would cost you replicate that benefit using investments alone. If your pension pays $4,000 a month and you want to guarantee your spouse receives that same income if you pass away first, you would typically need to either purchase a life insurance policy that's large enough to replace that income stream or hold enough in investments that your spouse could continue drawing from the portfolio without risk of running out. Both approaches carry real cost. Insurance premiums that compound over years or a larger investment balance held specifically as a buffer. A pension with a survivor benefit quietly absorbs both of those costs without a separate premium or a separate account. And that's a feature most people walk past without actually pricing it.
Some pensions also adjust for inflation every year called a cost of living adjustment or cola, while others are fixed at the same dollar amount for the duration. A fixed pension is still valuable, but it loses purchasing power every year inflation runs above zero. At a modest 2% annual inflation rate, a $4,000 monthly pension payment has the purchasing power of roughly 2,900 20 years into retirement. The check still says $4,000, but it buys considerably less. A pension with a cost of living adjustment preserves that purchasing power year over year, which over a long retirement makes a significant difference to how far that income actually stretches. It's worth knowing exactly which version you have before building any meaningful plan around it.
A retiree with a modest investment balance and a strong inflation-adjusted pension with a survivor benefit can be in a stronger financial position than a retiree with a much larger balance and no pension at all. That's the part a balance statement will never show you.
Knowing what a pension is worth on paper is one thing. Knowing how much you can actually rely on it is another. Because not every pension carries the same level of certainty. The pension calculation changes considerably depending on which kind of pension you actually have. And lumping all pensions together is where a lot of this advice that you find online really falls apart.
A government or military pension carries a level of backing that a private company pension simply doesn't. Military and most government pensions are funded through the taxing authority of the government itself, which makes the obligation extremely difficult to walk away from.
A private pension works differently. It's funded by the company you work for. Sitting in a separate trust the company is required to contribute to, but companies have underfunded those trusts before, and particularly during difficult financial stretches. There's a federal backstop for private pensions called the Pension Benefit Guarantee Corporation, but it only covers benefits up to a set limit. And that limit can be considerably lower than what a higher earner was actually promised. So, the same monthly dollar figure on paper can carry very different real-world risk, depending entirely on which side of that line it falls on.
A simple gut check helps here. Ask how the pension is funded and by whom. A pension backed by a government's ability to collect taxes is a different promise than a pension backed by a single company's balance sheet. Even if both checks look identical on the day they arrive in your bank.
There's also a piece of this most people never factor in at all. What your employer is contributing toward that pension on your behalf. Separate from whatever you're personally setting aside. Some workers are effectively having 20% or more of their total compensation directed toward retirement through the pension structure alone. Even though none of it shows up in a 401k balance, they can see or a number they can actually check. That contribution is still retirement saving. It just doesn't look like it and overlooking it is one of the most common reasons people think they're behind when they're actually not.
How much you personally need to save depends heavily on how much of that pension you can actually count on. A fully backed government pension with a cost of living adjustment supports a very different savings number than a private pension with no inflation protection and real funding risk attached to it.
Knowing how reliable your pension is gets you halfway to an answer. The other half is doing the actual math on your number. This is where most people get stuck because there's no real calculation happening. Just a vague sense that they're probably fine or probably behind with nothing underneath that feeling.
The actual number comes from three inputs in this order. What your expenses in retirement will realistically be, what your guaranteed income covers, your pension plus social security, and what's left over for your investments to fill in.
Working through a concrete example makes this clearer than any general description will. So, let's take a household planning to spend $7,000 a month in retirement. That's $84,000 a year covering housing, food, travel, health care, and just general living expenses. Their pension pays 3,500 a month, and social security adds another 2,000 a month between both spouses. That's 5,500 a month in guaranteed income, $66,000 a year that's already accounted for. The gap between what they plan to spend and what guaranteed income covers is $1,500 a month or 18,000 a year. That 18,000 is the only number their investment portfolio needs to produce. So, using that same 4% withdrawal rate that we talked about earlier, covering an $18,000 annual gap requires roughly 450,000 in investments. Not a million, not 2 million, but $450,000.
Now, take a second household with identical expenses and the same social security income, but no pension. Their guaranteed income is 2,000 a month, leaving a $5,000 monthly gap, $60,000 a year for investments to cover. At 4%, closing that gap requires 1.5 million dollars. Same lifestyle, same social security, three times the investment balance required, purely because the first household has a pen- pension, and the second does not.
Two retirees can have the exact same investment balance and end up in completely different positions. One with a $600,000 portfolio and a strong pension is fully covered with flexibility built in. The other with a $600,000 portfolio and no pension is very short. The balances identical, their retirements are not.
Your number is the gap between your expenses and your guaranteed income. Knowing that gap tells you what you need. It doesn't mean you should stop saving the moment you hit it. None of this is a case for doing the bare minimum once your number is covered. Continuing to save beyond that point still creates real value, just not the kind that shows up as a bigger balance. Extra savings beyond your number buys you flexibility. Retiring two or three years earlier than planned, dropping to part-time instead of full-time in your last working years, absorbing a major health cost without it derailing the rest of the plan, helping a family member through a hard stretch without putting your own retirement at risk. None of that requires hitting some arbitrary larger account balance. It requires having more room than the bare minimum demands. What actually matters is the number of options that account buys you. Knowing your real number and the options beyond it is the entire difference between guessing and actually being prepared.
So, if you have a pension and retirement is within the next 10 years, you're already managing more complexity than a single account or a single decision can handle. Your pension, your Social Security timing, your investment withdrawals, your tax exposure. Each one of those affects the others and getting one right while ignoring the rest leaves real money on the table.
I work with a select group of clients who want all of it managed together under one strategy by one advisor who understands how the pieces connect. If that's the relationship you're looking for, I'd encourage you to visit my website at cabaniswealth.com. There you can learn more about me, how we can work together, and schedule time for an initial consultation.