Kevin Lum: 4 Ways a Pension Reshapes Your Retirement Plan
Receiving a pension in retirement can be a game-changer. Only 18% of all workers currently participate in pension plan — according to the Pension Rights Center — making this a rare, yet coveted benefit. This could mean at least some standard retirement planning guidance may not apply to you.
Kevin Lum, certified financial planner (CFP) and founder of Foundry, shares plenty of money advice on his YouTube channel. However, in a recent pension-focused YouTube video, he turned the camera over to his colleague Mike Zarrelli, CFP with Foundry who specializes in pension planning.
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Zarrelli shared financial planning advice for pre-retirees expecting to embark on their golden years with a pension. If you fall into this category, keep reading for four ways a pension reshapes your retirement plan.
Additional Spending Power
A pension may increase your monthly budget and allow you to retire earlier than planned, according to Zarrelli.
“A pension creates an income floor and the portfolio creates a lot of flexibility in your retirement lifestyle,” he said. “And that combination can change your retirement timeline.
If you anticipate having a pension, he recommended running retirement planning numbers long before you plan to leave the workforce. Doing so can be eye-opening — in the best possible manner.
Portfolio Adjustments
As their time in the workforce comes to an end, traditional guidance tends to have pre-retirees move toward a less aggressive investment strategy. However, pension holders may benefit from a different approach.
“In some ways, the pension acts like a portfolio of bonds that are consistently paying you predictable income each year,” Zarrelli said. “Because of that, you can make the case that a retiree should factor in their pension into their overall asset allocation.”
When your portfolio isn’t needed to fund most everyday expenses, you may be able to shift your asset allocation to a heavier mix of equities, he said.
Social Security Planning
“When planned ahead of time, your pension and Social Security timing can work in tandem to mitigate longevity risk and protect your purchasing power,” Zarrelli said.
For example, if your pension starts in your early-to-mid-60s, you might be able to delay Social Security until at least your full retirement age or even up to age 70. This will allow you to maximize your benefit.
Looking closer, if you were born in 1960 or after, your full retirement age is 67, according to the Social Security Administration (SSA). However, if you wait to start collecting benefits until age 70, you’ll receive 124% of your full retirement benefit, according to the SSA.
Surviving Spouse Protection
“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," Zarrelli said.
Since the surviving spouse is typically able to keep the higher of the couple’s two benefits, delaying the higher-earners benefit can serve as another way to prematurely protect the other spouse, he said.
“Then you compare 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,” he explained.
Ultimately, it’s important to make these two choices in tandem, as they heavily impact one another, he added.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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