Retiring With a Pension? Here’s How It Changes Everything About Your Retirement Math

Retiring with a pension changes everything about your retirement math.
Most people think about retirement in terms of net worth—how close they are to a million, two million, or more. But if you have a pension, that old framework can send you down the wrong path. In this episode, James explains why retirees with pensions need to think in terms of cash flow, not balances on a statement.

James begins with a simple shift: a pension that pays $60,000 a year acts like the income from a $1.5 million portfolio under a traditional 4% withdrawal rule. That perspective alone can reduce the pressure many people feel when they compare their savings to generic benchmarks or to friends who rely entirely on investments.

He then walks through real scenarios—showing how a couple aiming to spend $80,000 per year may only need $600,000–$750,000 in savings if pension and Social Security cover the first half of their income needs. And in cases where the pension plus Social Security fully replaces spending, a retiree might not technically need any portfolio withdrawals at all. Cash flow drives the plan; the portfolio simply becomes optional support.

James  also covers the nuances most retirees overlook:
• How to plan for pensions without cost-of-living adjustments
• Why survivorship options can make or break a spouse’s long-term security
• How investment strategy changes when you don’t need to pull from your portfolio
• Why being 60 or 65 doesn’t automatically mean you need a conservative allocation

Retirees with pensions often have far more flexibility than they realize. The key is understanding how the pension slots into the income puzzle, how it affects withdrawal rates, and how it should guide investment decisions—especially for couples.

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Episode Transcript

SPEAKER_00 (00:00):
I just got off a call where I was talking to
someone who was really concernedabout their retirement because
they have a pension and theyhave no idea how that's supposed
to change the way they invest,and more importantly, the way
they plan for retirement.
So if you are watching this andyou have a pension, the way you
structure your retirement andthink about your investments is
gonna be significantly differentthan the person who does not
have a pension and the way theythink about theirs.
Here's the reality of thesituation.

(00:21):
When you think about retirement,we typically think about a
number.
I need to save X number ofdollars, I need to hit a million
or two million or whatever thatnumber might be for you.
That's the traditional way ofthinking about this.
And there's some truth to that.
But here's where that fallsshort.
We're not just chasing a networth because that net worth by
itself does not necessarilyguarantee us what we actually

(00:41):
need.
What we actually need inretirement isn't net worth, it's
income.
Here's a practical example.
When someone talks about saying,oh, I have a million dollars in
my portfolio, what does thatactually mean?
Well, it doesn't mean thatthey're gonna spend a million
dollars per year, of course.
No.
What it means is there's someportion of that number that they
can live on.
What we really need to do ismentally account for what that
million dollars translate towhen it comes to cash flow.

(01:02):
Because in retirement, it's yourcash flow that you care about,
it's your income that you careabout, not the portfolio value,
not the net worth.
So if you have a milliondollars, general rule of thumb
might say you can take four tofive percent per year of that
portfolio.
Four to five percent of theportfolio means$40,000 to$50,000
if your portfolio value is$1million.
So don't just look at the networth, it's the$40,000 to$50,000

(01:24):
that you actually should thinkabout.
So that individual has apension.
If you're sitting here saying,man, I don't have a million
dollars, I don't have twomillion dollars, or maybe you
do, but you also have a pension.
Here's how you should thinkabout your pension.
If you have a pension coming inand that pension is$5,000 per
month, well, that's$60,000 peryear.
If I were to use the general 4%framework, that's$60,000 per
year of pension income, it wouldtake a$1.5 million portfolio to

(01:48):
create that same level of incomeusing standard 4% withdrawal
rates.
So here's the perspective shift.
If you have a pension, that'swonderful.
And when you think aboutretirement, think of cash flow,
don't think of net worth.
Your net worth, I've seen fartoo many people fall into the
trap of saying, I'm retiring andI have a net worth of$4 million.
Well, that sounds really good.
You should be able to create apretty strong retirement, you

(02:10):
would think, with a$4 millionnet worth.
But then we look at that networth and it's okay, well, two
and a half million of it is in aprimary residence, a million of
it is in another property that'sa second home.
There's only$500,000 that'sactually liquid.
That full$4 million is notgenerating cash flow for you.
It's the portion that's liquid,it's the portion that's your
actual retirement account thatdoes create cash flow.
Now, if that property was arental property, that'd be a

(02:31):
different story.
But what we care about is cashflow.
And to use just an extremeexample to finally illustrate
this, let's assume you had a$10million net worth.
The entirety of it wasn't a veryprecious diamond, a very rare
diamond.
How valuable is that to you?
It's cool to say, it's cool tohave, it's cool to have that and
say I have a$10 million diamond,but it does you zero practical
good when you retire.

(02:52):
You can't shave off pieces ofthis diamond to use it to redeem
for cash to go pay for groceriesand travel and other expenses.
That's it.
It's illiquid, it's not doinganything for you.
So cash flow is the name of thegame.
A pension is not going to showup in your net worth statement.
You're not gonna look at yourbalance sheet and see 401k, bank
accounts, property, and thenpension, but your pension is

(03:13):
just as valuable as some ofthose pieces.
So let's quickly go through howyou should incorporate your
pension and your overallfinancial strategy, and then how
does that change how you shouldinvest?
And then there are a fewnuances, a few key nuances that
you need to understand if you'regonna use your pension as your
sole income source inretirement.
These are really importantthings to know if you want to
avoid being in a bad spot in thefuture because you did not take

(03:34):
care of a couple of these thingsor didn't think through a couple
of these things.
So going to the pensionframework, how should you think
about this?
Well, when you think about yourretirement, what you should
always start with is what do youwant to spend?
Let's assume you want to spend$80,000 per year throughout
retirement.
Well,$80,000 per year, where youmight initially go is geez,
well, if I need to take 4% peryear of my portfolio,$80,000

(03:56):
represents 4% of a$2 millionportfolio.
Do I need$2 million in myportfolio to live on$80,000 per
year?
No.
And here's why.
Most of you, even those of youwho don't have a pension, are
probably going to have SocialSecurity.
Let's assume that you and aspouse have combined$30,000 in
Social Security benefits.
So$80,000, keep in mind is whatyou want to live on.
$30,000 of that is coming fromSocial Security before you even

(04:17):
dip into your investments.
So it's really just theremaining$50,000 that you need
to spend.
So if that was all you had wasSocial Security and investments,
that$50,000 all needs to comefrom your portfolio.
So depending upon the withdrawalrate that you're using, that's
probably one to one and aquarter million dollars that you
need in your portfolio to beable to spend$80,000 per year.
Now let's use that same example,carry it over here, and now

(04:39):
assume you have a pension.
$80,000 is what you want tospend.
$30,000 is coming in from SocialSecurity.
Let's assume another$20,000 iscoming in from pension.
So$50,000 here is coming fromnon-portfolio income sources,
your pension, your socialsecurity.
It's that$30,000 gap, that$30,000 difference that does
need to come from yourportfolio.

(05:00):
So what do you do there?
Well, if you need to create$30,000 per year and you're
using a 4% to 5% withdrawalrate, you're going to need
somewhere between a$600,000 and$750,000 portfolio value today
so that you could create$30,000per year, adjusted for inflation
over the duration of yourretirement, assuming a standard
30-year retirement.
So what you can see here is thatpension meant that this

(05:22):
individual over here needed aportfolio almost half the size
of the person over here.
Now let's use one final exampleto really drive this home.
You want to spend$80,000 peryear, you and a spouse have
$30,000 per year coming in fromSocial Security, and you have
$50,000 per year pension.
Now all of a sudden, you have$80,000 per year coming in
that's fully meeting yourexpenses.

(05:43):
You theoretically don't need anymoney in your portfolio, and you
could still be just fine.
So this is the single biggestway that pensions impact your
retirement is people think interms of portfolio values when
they should be thinking in termsof cash flow.
I don't care if your next dollaris coming from a pension or an
IRA withdrawal, a dollar is adollar is a dollar, and they're
both going to do the same thingfor you.

(06:04):
So all else being equal, thehigher your monthly pension
amount, the lower amount youneed in your portfolio to
maintain the same standard ofliving.
So much so that in some cases,people very strong pensions,
especially if it's two spouseswith the pensions, don't
technically need any money in aportfolio to be able to retire
and be in a very secure spot.
Now, here's where people couldget hung up with this.

(06:25):
Number one, do you have a costof living adjustment on your
pension?
So if we go back to thatexample, if you want to spend
80,000, Social Security is30,000 per year.
That's going to keep up withinflation.
The 80,000 is certainly going togo up with inflation because you
want to keep making sure thatyour purchasing power keeps up
with inflation.
But what if that 50,000 per yearfrom your pension doesn't keep
up with inflation?

(06:46):
Typically government pensionswill have cost of living
adjustments, and typicallyprivate pensions do not.
This is not a universal rule.
This is just more common in eachof these.
So if you don't have a cost ofliving adjustment, well, year
one, you're fine.
50,000 from pension, 30,000 fromSocial Security covers
everything.
But year number two, ifinflation goes up by 3%, it's

(07:06):
not 80,000 per year that youneed to live on.
It's about 82,400 that you needto live on.
Well, now there's a little bitof a gap.
And then the following year,there's a bigger gap and a
bigger gap and a bigger gap.
And yes, Social Security isincreasing with inflation, but
your pension isn't.
So in that case, even though itmight seem like you're good year
one, you need to plan for what'sthat gap going to do over time

(07:26):
and how do you save in yourportfolio or savings account, or
how do you offset the impact ofthat by using various other
sources?
The second thing you need tounderstand about retiring with a
pension is you need tounderstand the survivorship
options.
If I have a 401k, for example,that my spouse and I are living
on a retirement and I pass away,she's going to inherit the
entire value of that 401k.
So whatever income it wascreating, she can continue

(07:48):
creating that on her own.
If I have a pension, though,that's not necessarily the case.
When you have a pension,typically you're going to be
able to elect different options.
Do I want to take a lifetimepension, which is going to be a
higher number, but that pensiononly lasts for as long as I
live?
Or do I want to take what'scalled a joint and survivor
option?
If I accept a lower amount fromthe pension, but if I

(08:11):
pre-decease my spouse, thatincome continues over the course
of her lifetime too.
This is a very important, anextremely important planning
point to planning decision,because some people are tempted
to say, well, you know what?
I'm going to take the higheramount.
I want more money so that whilewe're both living, my spouse and
I can both enjoy it.
What happens if that spousepasses away a year into
retirement, two years intoretirement, and their spouse has

(08:34):
another 20, 30 years to liveafter that?
Where's that money going to comefrom?
If you're not carefully planningfor this, you could be in a
world of trouble.
So a couple planning points.
Do you make sure that you'rebuilding up a portfolio so that
you can take that single lifeoption?
And if something happens to you,your spouse still has portfolio
to live on?
Or do you consider taking thejoint and survivor benefit?
By the way, the joint andsurvivor benefit could be 100%

(08:55):
joint and survivor, 75%, 50%.
There's different options, andall of them are very important
to plan through to say, how dowe make sure that you're
maximizing your income while thetwo of you are alive, if you're
married, and the survivingspouse is also taken care of
when the first spouse passesaway.
And then the third nuance totake into account here is what
do you do with your investments?
How do you invest differentlywhen you have a pension that

(09:15):
covers most or all of youractual income needs?
Well, this is where it very muchbecomes a personal preference.
Going back to the purpose ofinvestments, the purpose of
investments is to meet yourincome needs.
So if you don't need any incomefrom the investment, then it
goes down to how can you beinvested?
Well, people are typicallyretiring in their mid-60s.
And in their mid-60s, they'rethinking, well, I should be kind
of moderate or kind ofconservative in my investment

(09:36):
portfolio.
But that's not because you're 60or 65 that that's the case.
It's because typically people atthat age start needing to pull
from their portfolio.
And if you need to pull fromyour portfolio, you need to have
at least a portion of that thatis more secure, that is more
stable, that is more protectedfrom the ups and downs of the
market.
So if that's not the case, ifyou don't actually need anything
from your portfolio, you canthrow out some of those

(09:58):
traditional rules.
You could afford to be investeda lot more aggressively if you
are more comfortable with that.
What does that mean?
Well, markets go up and marketsgo down.
So you're going to experiencemore of those ups and downs in
your portfolio.
But if you can think to yourselfand understand, I don't need
this money, so I can accept thatI'm okay with that, you're going
to have longer-term growthpotential.
No guarantee, but much bettergrowth potential.

(10:19):
Or you might think, you knowwhat?
I know I could grow more, butI'm just not personally
comfortable with that.
Maybe you still are a bit moremoderate or have a bit more of
conservative investments inthere.
Not because you need to, butbecause it fits with your risk
tolerance.
It fits with your comfort levelaround investing.
So that's where you have a lotmore freedom and flexibility to
do what makes sense for you.
You're not as restrictive aswhat you can do with your

(10:40):
investments because you need acertain amount to be
conservative and need a certainamount to be more aggressive.
So don't just think that becauseyou're 65, you should invest
like all other 65-year-olds doif you have a pension.
You should think very clearlyabout how does this play into my
overall plan?
Is this money I want to use tospend more in the future?
Is this legacy money?
Is this money I'm going to setaside for a long-term care event

(11:01):
if and when it happens?
Depending on what your answeris, you should think about
investing that moneydifferently.
But if you have a pension andyou're retiring, that pension
can be a wonderful tool tounlock a whole lot of what
you're doing.
Think of that pension and thinkof retirement in terms of cash
flow, not in terms of net worth.
And once you understand how thischanges your plan, you can
optimize a retirement that worksbest for you.