Can You Retire Without a Pension Plan?

Here’s how to sort through your options and plan for a successful retirement, whether you have a pension or not.

A middle-aged man works on his laptop next to paperwork sitting on his kitchen table.
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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.

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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.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Laura Schultz, J.D., IAR
Co-Owner of Preservation Retirement Services, Wealth Adviser

After 12 years of working as a successful commercial litigation attorney, Laura Schultz made the transition to being a wealth adviser to connect with clients and change their lives for the better by preparing them for retirement success. Now the co-owner of Preservation Retirement Services with her husband, Tim, she is a Series 65 securities-licensed and insurance-licensed financial professional and holds a Series 65 license and is an Investment Adviser Representative of Creative One Wealth, LLC. When she’s not helping clients understand and simplify their investment options, she loves cheering on the University of Iowa and spending time with her family.