A 7-Point Retirement Checklist for People Retiring With a Pension
If you've spent decades being a disciplined saver, you may need to learn how to confidently use the wealth you've accumulated. Here's how you can maximize your money and your life in retirement.
Having a pension can provide a powerful foundation for retirement. If you also have significant savings, your planning challenges may look very different from those of the average retiree.
For many Americans, retirement planning revolves around one question: "Will I have enough money to last?" But what if you have a pension that will provide reliable income for life, and you've also accumulated $1 million or more in savings?
This changes the retirement planning equation. I know this because, as a CERTIFIED FINANCIAL PLANNER® professional and the founder and CEO of Peak Retirement Planning, I specialize in serving those with pensions and more than $1 million saved.
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You may have more flexibility than you realize when it comes to investing, withdrawing money and managing taxes. At the same time, having a pension and significant assets can create planning challenges that are easy to overlook, particularly when it comes to required minimum distributions (RMDs), Roth conversions and your eventual legacy.
I call this group the 2% Club: People who have both a pension and substantial retirement savings (I even wrote a book about this group — you can request it for free).
Many also fit what I call the Midwestern Millionaire profile: Hardworking, frugal and diligent savers who spent decades prioritizing saving over spending.
If that sounds like you, congratulations. You've done the hard part. Now comes the part that requires a different kind of planning.
Here are seven areas to put on your retirement checklist. And if you'd like to watch a video about it, here you go:
1. Build an investment plan around your pension
One of the biggest mistakes I see is assuming that every retiree needs the same investment portfolio. You may have heard that retirees should simply use a traditional 60/40 portfolio, but there is no universal investment allocation that works for everyone.
A pension can significantly change your risk profile because it provides a source of income that isn't dependent on the performance of your investment portfolio. Think of your pension as one part of your overall retirement income picture, then ask:
- How much income will I need from my investments?
- How much of my spending will my pension cover?
- What are my goals for leaving money to my children or grandchildren?
- Do I have charitable goals?
- How much investment risk am I comfortable taking?
- How important is preserving principal vs maximizing long-term growth?
For someone whose pension covers most or all of their essential expenses, their investment portfolio may have a different job than it does for someone who depends heavily on portfolio withdrawals. That could mean taking more investment risk because you have a reliable income floor.
On the other hand, it could mean taking less risk because you don't need your portfolio to generate aggressive returns.
The key is that your pension should be incorporated into your investment strategy, not treated as a completely separate issue.
2. Pay attention to tax location, not just asset allocation
Once you have determined what you should own, the next question is: "Where should you own it?" Many retirees have money spread across several types of accounts:
- Traditional IRAs and 401(k)s
- Roth IRAs
- Taxable brokerage accounts
These accounts don't all receive the same tax treatment, which creates an opportunity to think strategically about tax location.
For example, if you have growth-oriented investments that you expect to appreciate substantially over time, holding some of those investments in a Roth account may allow that future growth to occur tax-free, assuming you follow the applicable Roth account rules.
At the same time, assets designed primarily for preservation or income may be candidates for tax-deferred accounts, depending on your broader strategy.
Your taxable brokerage account presents another opportunity. Investments that generate capital gains may receive different tax treatment than investments generating ordinary income.
Tax-loss harvesting can also potentially help offset capital gains and ordinary income, while a properly constructed portfolio may offer greater tax efficiency.
The point isn't that one type of investment always belongs in one particular account; it's that your investment and tax strategy shouldn't operate independently. Where you hold an investment can be almost as important as what you invest in.
3. Prepare for RMDs
If you have accumulated substantial money in traditional IRAs, 401(k)s or other tax-deferred accounts, RMDs deserve attention well before they begin.
Under current law, the applicable starting age depends on your birth year, with some individuals subject to RMDs beginning at age 73 and those born in 1960 or later generally beginning at 75.
For someone with a large tax-deferred balance, RMDs can become significant.
Consider a hypothetical retiree who is 60 and has $2 million in tax-deferred accounts. If those assets continue to grow for another 15 years, the balance could be substantially larger by the time RMDs begin.
This is where having a pension can create an unusual situation. Many retirees have been told that they'll automatically fall into a lower tax bracket after they stop working, but if you have a sizable pension, Social Security and substantial tax-deferred savings, your taxable income in retirement could remain high, or even increase.
Your pension provides valuable income, but it can also mean that you have less room to absorb large RMDs at low tax rates.
That's why planning for RMDs should begin years before the first distribution is required.
4. Consider whether Roth conversions make sense
Roth conversions can be one tool for addressing a large future RMD problem. The basic concept is straightforward: You move money from a tax-deferred account, such as a traditional IRA, into a Roth IRA and pay the applicable income taxes on the converted amount.
In exchange, the money can potentially grow tax-free in the Roth account, and qualified Roth IRA withdrawals are tax-free. The challenge is determining how much to convert and when.
Converting too much in a single year could push you into a higher tax bracket or trigger other tax consequences. Converting too little could leave you with a large tax-deferred balance and potentially larger RMDs down the road.
That's why I prefer to think about Roth conversions as a multiyear tax-planning strategy rather than a one-time transaction.
For retirees with pensions and substantial tax-deferred assets, the goal may be to create greater tax diversification by having money available in taxable, tax-deferred and tax-free accounts.
This diversification can provide more flexibility later. You don't necessarily know what your future tax rate will be, but you can give yourself more options by not having your entire retirement portfolio concentrated in one tax bucket.
5. Plan for the 'widow's penalty'
For married couples, retirement planning shouldn't stop at determining whether both spouses have enough money. You also need to ask: "What happens financially when one spouse passes?"
When a married couple file taxes jointly, they benefit from married-filing-jointly tax brackets and a larger standard deduction. After one spouse passes, the surviving spouse may eventually have to file as a single taxpayer, and at the same time, the surviving spouse may lose some income, depending on the pension and Social Security benefits involved.
This combination can create what is sometimes called the "widow's penalty." The surviving spouse could have less income but pay more in taxes. This is one reason tax planning should happen before a spouse dies.
For example, a married couple may want to evaluate whether Roth conversions or strategic withdrawals make sense while both spouses are alive and filing jointly.
And don't overlook the practical side of the equation. If one spouse has always handled the investments, taxes and financial decisions, what happens when that spouse is gone?
A successful retirement plan isn't just one that works mathematically; it needs to be a plan that the surviving spouse can understand and implement.
6. Don't overlook legacy planning
If you've accumulated significant wealth, retirement planning eventually becomes estate planning. That means making sure the legal documents supporting your wishes are in place and up to date.
At a minimum, review whether you have the appropriate documents, such as:
- A will
- Financial and healthcare powers of attorney
- Healthcare directives or a living will
- Beneficiary designations
- Appropriate trust arrangements, when applicable
But estate planning isn't just about determining who gets your money; it's also about determining how efficiently they receive it.
For example, inherited retirement accounts can have different tax consequences than inherited taxable investments.
Under current rules, many non-spouse beneficiaries who inherit retirement accounts are generally subject to the 10-year rule, meaning the account must be distributed within 10 years. This can create significant tax consequences for beneficiaries, particularly if they inherit a large traditional IRA and are already high-income earners.
State estate and inheritance taxes can also matter, particularly for retirees living in states with their own estate tax systems.
The more you've accumulated, the more important it becomes to look at your retirement and estate plans as one integrated strategy.
7. If you haven't retired yet, carefully evaluate your pension options
If retirement is still a few years away, don't wait until you're ready to walk out the door before examining your pension options. This is particularly important when evaluating survivorship options and lump-sum choices.
A pension may offer several ways to structure your benefit. You might have to choose between receiving a larger monthly payment for yourself or accepting a reduced payment that continues to a spouse after your death. There isn't one universally correct answer.
Your decision should consider your spouse's age, health, other income sources, assets, life expectancy and the amount of income they would need if you passed first.
In some cases, life insurance could potentially be part of the equation. In other situations, retaining the pension's survivor benefit may make more sense. And some households may have enough assets that they can effectively self-insure.
The key is to calculate the actual need. Don't spend thousands of dollars for a survivorship benefit simply because you're afraid of what could happen. But also, don't eliminate a valuable survivor benefit simply because you're trying to maximize your own monthly check.
The same principle applies to the lump-sum option. The attractiveness of taking your pension as a lump sum can depend on factors such as interest rates, the pension's financial strength, your investment strategy, your income needs and your legacy objectives.
It shouldn't be an emotional decision driven by fear; it should be a mathematical and financial decision based on your specific circumstances.
Having a pension and significant retirement savings is something to celebrate, but it also means you shouldn't necessarily follow generic retirement advice designed for someone with an entirely different financial picture.
Your pension may give you greater flexibility with your investment portfolio. Your savings may create opportunities for Roth conversions and tax diversification. Additionally, your higher retirement income may make tax planning even more important.
The biggest mindset shift may be this: Your goal isn't simply to avoid running out of money. If you've spent decades being a disciplined saver, you may actually have the opposite problem; you may need to learn how to confidently use the wealth you've accumulated.
That means planning not only for how to maximize your money, but also for how to maximize your life, purpose and experiences in retirement.
A successful retirement plan should answer more than "Will I have enough?" It should answer, "How can I use what I've built to live the retirement I actually want?"
Related Content
- If You're in the 2% Club, the 'Tax-Free Retirement' Myth Doesn't Apply to You
- 8 Retirement Tax Strategies Your CPA Won't Tell You
- When Is a Roth Conversion a Bad Idea? 6 Situations Retirees Should Consider Carefully
- Why a Roth Conversion Is Wrong for Most People But Often Right for Pension Holders
- Many Retirees With a Pension and $1 Million-Plus Do These 7 Things (and Regret It Later)
