If you have a pension, you may be sitting on far more retirement firepower than you realize. Most people think about retirement wealth in terms of account balances. But a pension doesn't show up on a brokerage statement, and that causes a lot of people to underestimate what they actually have. In this episode, Foundry Financial planner Mike Zarelli breaks down four retirement reframes for pension holders that could change when you retire, how much you spend, and how you invest: 1. You may be able to retire sooner and spend more than you think. A pension creates an income floor that can take pressure off your portfolio and free it up for larger, intentional purchases. 2. Your pension changes how your portfolio should be allocated. When you factor in the pension as a bond-like income source, you may have room to tilt toward more equities than you'd expect. 3. Your pension can influence when you claim Social Security. With the right coordination, you can potentially delay Social Security to maximize your benefit and build a stronger inflation-protected income floor. 4. Your pension survivor options should never be chosen in isolation. The right survivor benefit depends heavily on how you've structured Social Security for the higher earner. These decisions are deeply connected, and getting them right could mean the difference between a retirement that just works and one that truly gives you confidence.
[00:00:00] Hey, welcome to another episode of Retirement Made Simple. I'm your host, Kevin Lum. I'm a certified financial planner based in Los Angeles, and this podcast is dedicated to helping a million people retire without worry. As a quick reminder, every episode here comes straight from our YouTube channel. So this is just the audio, so you can listen while you're walking, driving, or living your life. Let's dive in.
[00:00:26] If you have a pension, you are holding one of the most valuable and also one of the most misunderstood assets in retirement planning. Because planning for retirement with a pension is a completely different ballgame than planning for retirement without a pension. And so today we're going to look specifically at planning for retirement with a pension. So today I have a treat for you. You are going to get to hear from Mike Zarelli. He's a financial planner on our team here at Foundry who specializes in pension planning.
[00:00:56] You are going to be planning. You are going to be planning. You are going to love Mike. I am excited for you to meet Mike. Mike, take it away.
[00:01:02] Most people think about net worth in terms of assets and liabilities. But if you have a pension, part of your retirement wealth may not show up as an account balance on that statement. For example, a $5,000 a month pension provides $60,000 a year of income. Using the 4% withdrawal rule of thumb, you would need roughly $1.5 million invested to recreate that same level of income.
[00:01:28] Of course, a pension is not the same as an investment account. It usually doesn't provide the same liquidity, flexibility, growth, or inheritance potential. But from an income planning perspective, it can act like a hidden retirement asset. As a financial planner near the nation's capital, I've worked with hundreds of government employees and other retirees with pensions. And I've seen how much this one retirement benefit can impact the rest of your plan.
[00:01:58] We're going over why people with pension may need to think differently about retirement. But first, for those I haven't met yet, I'm Mike Zarelli. I'm a certified financial planner professional and enrolled agent here at Foundry Financial. With that, let's dive in. The first retirement reframe for people with a pension is that you may be able to spend more than you think and retire sooner than you think. A pension can provide a lot of peace of mind, but some retirees still avoid touching their portfolio at all costs.
[00:02:28] And I get it. It's uncomfortable watching your balance go down in retirement. But when your baseline expenses are covered by steady income and your portfolio can be used more intentionally for larger one-time expenses like home renovations, travel, Roth conversions, or giving while you're alive. From my experience, some of the strongest retirement plans are built around this reliable pension plus a solid nest egg investment portfolio.
[00:02:54] That's because a pension creates an income floor and the portfolio creates a lot of flexibility in your retirement lifestyle. And that combination can change your retirement timeline. So if you expect to have a pension in retirement, don't wait until you're ready to retire or reach a certain threshold with your pension benefits, like 30 years of service, to start running the numbers. Because oftentimes you may find out the pension is going to give you more options than you realized.
[00:03:22] Tomorrow is not promised, so we're often encouraging clients to live more today, especially when they already have some of their retirement paycheck covered. The second retirement reframe for people with a pension is how they think about the rest of their portfolio. In some ways, the pension acts like a portfolio of bonds that are consistently paying you predictable income each year. Because of that, you can make the case that a retiree should factor in their pension into their overall asset allocation.
[00:03:50] When you do, you may realize you have more bond-like assets than you actually think. In addition, if this pension is covering most or all of your month-to-month expenses, the portfolio has less pressure on it to fund everyday spending. Fewer withdrawals from the nest egg may create more room to tilt the portfolio towards more equities.
[00:04:11] If you're using retirement buckets like we do at Foundry, your cash, short-term, and intermediate-term buckets may not need to be as large as someone without that fixed income. Of course, this all depends on your risk tolerance, income needs, and ability to stay invested through the ups and downs of the market. The third retirement reframe is that your pension may change when you take Social Security.
[00:04:33] When planned ahead of time, your pension and Social Security timing can work in tandem to mitigate longevity risk and protect your purchasing power. If someone has a pension that starts earlier in retirement, say around age 62 or 65, that income may provide more confidence to delay Social Security until full retirement age or even age 70. Delaying to full retirement age helps you avoid the pay cut that comes from claiming early.
[00:05:01] And delaying beyond full retirement age can increase your benefit by roughly 8% per year until age 70. So think about this example. A retiree has a pension that has a cost of living adjustment. Because of that, they may be able to pair this with a maximized Social Security benefit that also receives a cost of living adjustment. Together, these two income sources can create a very stable income floor.
[00:05:27] That can help protect your purchasing power, especially if you're going to have a retirement lasting three or four decades. The fourth retirement reframe is how you protect a surviving spouse from a premature death. If a married retiree has a pension with survivor options available, which one you choose should be coordinated with the Social Security surviving spouse rules.
[00:05:49] As many of you know, for Social Security, when one spouse passes away, the surviving spouse generally gets to keep the higher of the two benefits. So delaying the higher earner's Social Security benefit can provide another layer of income protection from one spouse prematurely passing away. Then, you can pair that with the pension survivor options that you have available and choose one that makes sense for your ages, health, and desired peace of mind.
[00:06:17] For example, maybe you go with the 50 or 75% survivor option instead of a full 100% option because you maxed out the higher earner's Social Security. That alone will already keep that income floor pretty high because the maxed out Social Security can keep the income floor from dropping too much if one spouse passes away prematurely. The key is that these decisions should not be made in isolation. Here's the takeaway from today's video.
[00:06:44] A pension is much more than just a monthly income. It's a major planning factor that can affect several different areas of your retirement plan. It can change how much you spend, when you retire, how you invest, when you claim Social Security, and how you protect a surviving spouse. That's why people with pensions may need to reframe how they think about retirement.
[00:07:07] The key part is evaluating all of these variables helps you use your money more intentionally, avoid costly mistakes, and retire with more confidence. I hope that was helpful and I told you you were going to love Mike. This is exactly why I wanted Mike to make this video because he knows pensions backwards and forwards. And if you're interested in working with Mike or working with Foundry, I will pin some information in the comments below. He is also a content creator and so I'll include a link to some of Mike's other content.
[00:07:36] Now, if you missed me and you're like, I really wanted to hear from you today. Well, you're in luck. I have a video that I did on pensions from a few months back and you can watch it now. Hey, thanks for listening. If you enjoyed this content, if you'd do me a favor and just leave a review on whatever podcast app you're using, Apple or Google or Spotify. And also you can find us on YouTube. Just search Foundry Financial or Retirement Made Simple. You should be able to find us by searching both. And then you can find our website at foundryfinancial.org. Thanks for listening.