Why Some People With Pensions Still Fall Short in Retirement

Saving for retirement is often reduced to a simple rule of thumb: put away 15% to 20% of your income and you’ll be fine. But that guideline assumes one very important thing that you don’t have a pension.

For people with pensions, the math changes in meaningful ways. A pension represents pre-funded retirement income, and understanding its value can help determine how aggressively you actually need to save.

Why pensions change the savings equation

A pension provides guaranteed income for life, much like Social Security. That guaranteed income reduces the amount you need to generate from personal savings. Without a pension, saving 15% to 20% of income is a reasonable target. With one, the required savings rate can be lower depending on the size and reliability of the benefit.

For example, a pension that replaces 30% to 50% of final salary can significantly reduce the burden on personal savings. In those cases, saving closer to 10% to 12% of income may be sufficient. Smaller pensions, replacing only 10% to 20% of income, don’t move the needle as much and still require saving closer to traditional guidelines.

What a pension is really worth

It’s helpful to think of a pension in investment terms. Roughly speaking, $1,000 per month in pension income is equivalent to having about $250,000 to $300,000 invested. That’s money you don’t need to build yourself.

This is why retirees with pensions often spend a higher percentage of their guaranteed income than they do from savings. Pensions and Social Security feel stable. Investment withdrawals feel discretionary.

Finding your retirement income gap

The most effective way to plan isn’t by focusing on savings percentages, but by identifying the gap between guaranteed income and retirement spending goals.

If a pension provides $40,000 per year and Social Security adds another $24,000, that’s $64,000 of dependable income. If the retirement goal is $70,000 annually, personal savings only need to cover a $6,000 gap.

Contrast that with someone whose pension provides $15,000 per year. Even with Social Security, they may need to generate $30,000 or more from investments, requiring a much larger nest egg.

Why investments still matter, even with a pension

A pension doesn’t eliminate the need for savings. Unexpected expenses don’t arrive on schedule. Medical costs, home repairs, family support, or long-term care needs can all exceed guaranteed income.

Investments provide flexibility. They act as a buffer for surprises and allow retirees to adapt when life doesn’t follow a neat plan.

Age matters when relying on a pension

Younger workers should be cautious about leaning too heavily on pension projections. Companies change, plans evolve, and benefits can be altered over time. Treating a pension as a bonus rather than a guarantee encourages stronger saving habits early in a career.

For workers closer to retirement, pensions are typically more reliable. There’s less time for plan changes, and benefits are often clearer. Still, understanding how the pension is funded and whether it adjusts for inflation remains important.

Evaluating pension strength and reliability

Not all pensions are created equal. Key factors include the financial health of the employer, whether benefits are inflation-adjusted, and how the plan is insured. The Pension Benefit Guaranty Corporation provides limited protection for certain plans, but coverage caps exist.

If a pension appears underfunded or uncertain, increasing personal savings can provide peace of mind and protection against future changes.

Build a strategy around your reality, not a rule

The biggest mistake people make is applying generic savings rules without considering their actual income sources. A smarter approach starts by calculating how much of retirement spending will be covered by pensions and Social Security, then determining how much personal savings need to fill the remaining gap.

Retirement planning isn’t about hitting a magic percentage. It’s about aligning savings with guaranteed income, lifestyle goals, and risk tolerance.

All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.