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Once upon a time pensions were the backbone of financial security in retirement. Faced with market risk and the growing cost of benefits, much of the private sector has transferred preparing for retirement to employees. Members of the military, Federal employees, many state and local government employees still benefit from pension plans.

To understand just how powerful even a small pension is, a $1,000,000 investment portfolio can generate an annual income stream of $40,000.

Pensions are important because they provide a stream of income that cannot be outlived.

But they are not perfect.

  • Many pensions do not have cost of living inflatorsā€¦ making it difficult to maintain purchasing power later in retirement.
  • Many are under funded and may fail. Beneficiaries may be eligible for a reduced pension from the Pension Benefit Guarantee Corporation. But it is also under funded.
  • Pensions cannot be passed on to survivors. Many offer a reduced benefit for a surviving spouse at a cost. But since two live nearly as cheaply as one, a lesser benefit could create hardship for a surviving spouseā€¦ particularly if the pension recipient died shortly after retiring.

Be sure to compare the cost of life insurance with the cost of the survivor benefit. If you are healthy you may be able to take the higher single life benefit and pay premiums on a life insurance policy to protect your spouse and keep the difference.


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