A pension, Social Security and some personal savings: A few decades ago, this was all most retirees needed to fully enjoy their golden years. Fast-forward to today, one of those three pillars has largely vanished. In 1975, 27.2 million workers had a pension plan through their employer, according to the Congressional Research Service, but by 2019, that number had dropped to just 12.6 million.
With fewer retirees having a steady stream of pension income to rely on, it’s crucial to create alternative income sources to use in retirement. While this is a big responsibility for retirees and their financial advisers, I believe it also provides more opportunity for growth and creative strategies that can help you thrive financially during your golden years.
What happened to pensions?
Pension plans, or defined-benefit plans, used to be standard. In the 1980s, companies began to shift away from offering pensions because folks were living longer, and the plans became expensive for employers. Companies were not only on the hook to pay their past employees in retirement, but they often had to provide income for a spouse’s lifetime as well. For example, my grandma lived to be 101 years old, and she collected pension payments from my grandpa’s company for about 50 years after he passed away.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
To shake that liability, companies began offering defined-contribution plans, like 401(k)s and 403(b)s. Defined-contribution plans put both power and responsibility into the hands of the employees. Companies can still contribute to employees’ retirement plans through company matching programs, but it’s up to the employee to put money from their paycheck toward their future retirement.
Although shrinking, pension plans are still available for some Americans. Some teachers, government workers, military personnel, firefighters and construction workers still have access to defined-benefit plans, just to name a few. If you’re one of the lucky few, you’re likely facing the difficult decision of how to make the most of your pension plan.
Should I take a buyout?
Many companies are now offering pension buyouts to their employees to avoid future pension payments. Last year, U.S. corporate pension buyout sales hit a record of $48.3 billion, according to LIMRA. If you’re offered a buyout, you have two options: taking a lump sum or annuity payments. A lump sum gives you immediate access to your money, whereas an annuity offers payments over a set duration.
Every buyout deal is a little different, and retirement needs vary from person to person, so there’s no one-size-fits-all solution. However, taking a lump sum buyout may be a good option. It gives you control over the money rather than relying on your company’s investment choices. This gives you the freedom to put that money in a position that benefits you most, such as investing in a specific stock or purchasing a fixed index annuity. Plus, pension payments are taxed as ordinary income, so an annuity buyout locks you into a taxable income stream for life.
It’s important to note that your pension can affect your future Social Security benefits. If your employer did not withhold Social Security taxes from your paycheck, your Social Security benefits may be severely reduced due to the Windfall Elimination Provision, or WEP.
If you haven’t been offered a buyout, you still face a similar decision when retirement draws near. You’ll have to choose a pension option that best fits your needs:
- Taking it as cash.
- Initiating an income drawdown.
- Buying an annuity.
- Doing a mix-and-match approach.
I recommend consulting your financial adviser to determine the right option for your specific income needs and tax strategy.
Can I afford retirement without a pension?
Having enough money to fund a long and enjoyable retirement is possible, even without a pension. If you’re one of the many Americans with a 401(k) or 403(b) rather than a pension plan, it’s up to you to create enough retirement income to live on.
Determine your needs. Knowing how much income you’ll need month-to-month in retirement will give you an accurate savings goal and help you determine how much investment risk you’ll need to take on. Estimate all your expenses, including necessities like food and utilities in addition to discretionary expenses like travel or hobbies.
Consider an annuity. Certain annuities, like a fixed index annuity (FIA) with an income rider, can generate an income stream for life that acts as a type of “private pension.” Unlike other investments, FIAs protect your money from downside risk, which guarantees you’ll never lose money.
Diversify your investments and savings. Using a wide range of savings tools, investments and asset classes can help spread out your risk and create multiple income sources to pull from in retirement.
For example, it may be helpful to have a mix of pre- and post-tax savings along with cash-value insurance policies, bonds, mutual funds, annuities and investment real estate properties. You don’t necessarily want to liquidate your market positions in a down market to get cash, and having a wide variety of investments to tap into can help avoid that.
Focus on tax strategy. You may spend decades putting money in your 401(k) and wind up with $1 million, but if you owe 25% in taxes upon withdrawal, it’s really not that much to live on. As you save for your golden years and think about how you’ll withdraw money in retirement, keep taxes at the forefront of every decision.
Optimizing your taxes, both now and in the future, can help your money stretch even further and protect you from running out of money.
Maximize Social Security. Social Security benefits are not designed to fully fund your retirement — the average Social Security recipient gets about $1,700 every month — but getting the most out of your benefits can help bridge the gap if you don’t have a pension. If you wait to claim beyond your full retirement age, you’ll receive an additional 8% every year until age 70.
Whether you have a pension or not, creating a successful retirement requires proactive planning, careful strategy and individualized guidance. I recommend meeting with a financial adviser who can help you through every decision, from picking a pension option to creating income streams and everything in between.
Related Content
- Can My Pension Trigger a Retirement Tax Bomb?
- Optimize Your Taxes With These Two Common Strategies
- Don’t Have a Pension? The SECURE Act Could Help
- Pension Lump Sum Option vs. Annuity Payment: Which Is Better?
- Five Tips for Becoming a Financially Successful Couple
-
December Fed Meeting: Live Updates and CommentaryThe December Fed meeting is one of the last key economic events of 2025, with Wall Street closely watching what Chair Powell & Co. will do about interest rates.
-
This Is Why Investors Shouldn't Romanticize BitcoinInvestors should treat bitcoin as the high-risk asset it is. A look at the data indicates a small portfolio allocation for most investors would be the safest.
-
I'm a Federal Benefits Pro: I Answer These 2 Questions a LotMany federal employees ask about rolling a TSP into an IRA and parsing options for survivor benefits, both especially critical topics.
-
Why Investors Shouldn't Romanticize Bitcoin, From a Financial Planner
Investors should treat bitcoin as the high-risk asset it is. A look at the data indicates a small portfolio allocation for most investors would be the safest.
-
I'm a Financial Pro Focused on Federal Benefits: These Are the 2 Questions I Answer a Lot
Many federal employees ask about rolling a TSP into an IRA and parsing options for survivor benefits, both especially critical topics.
-
Private Credit Can Be a Resilient Income Strategy for a Volatile Market: A Guide for Financial AdvisersAdvisers are increasingly turning to private credit such as asset-based and real estate lending for elevated yields and protection backed by tangible assets.
-
5 RMD Mistakes That Could Cost You Big-Time: Even Seasoned Retirees Slip UpThe five biggest RMD mistakes retirees make show that tax-smart retirement planning should start well before you hit the age your first RMD is due.
-
I'm a Wealth Adviser: My 4 Guiding Principles Could Help You Plan for Retirement Whether You Have $10,000 or $10 MillionRegardless of your net worth, you deserve a detailed retirement plan backed by a solid understanding of your finances.
-
A Retirement Triple Play: These 3 Tax Breaks Could Lower Your 2026 BillGood news for older taxpayers: Standard deductions are higher, there's a temporary 'bonus deduction' for older folks, and income thresholds have been raised.
-
If You're Retired or Soon-to-Be Retired, You Won't Want to Miss Out on These 3 OBBB Tax BreaksThe OBBB offers some tax advantages that are particularly beneficial for retirees and near-retirees. But they're available for only a limited time.
-
Waiting for Retirement to Give to Charity? Here Are 3 Reasons to Do It Now, From a Financial PlannerYou could wait until retirement, but making charitable giving part of your financial plan now could be far more beneficial for you and the causes you support.
