Federal, state, and local government employees—including firefighters, police officers, construction workers, utility and transportation employees, and unionized workers—are more likely to have pension benefits as part of their retirement plans compared to private-sector employees.
A traditional pension is a defined-benefit plan sponsored by the employer that provides a stream of income—often for life—to the retired employee. Typically, benefits are based on salary and years of service. The employer is responsible for funding and managing the plan’s assets, making pension obligations liabilities that must be reflected on the company’s balance sheet.
Some organizations may also offer access to a 457 plan—a defined-contribution plan structured similarly to a 401(k)—which is funded primarily through employee contributions. These plans may or may not include an employer match.
Recently, many municipalities have shifted toward a hybrid model that combines a reduced pension benefit with a matching contribution to a 457 plan. This change places more responsibility for retirement savings on the employee. While this might seem like a downgrade, it can give employees greater control over their retirement funds. With a 457 plan, the employee decides how much to contribute up to a generous limit, how to invest the funds, and who receives the money in the event of their death.
Having a “guaranteed” income stream from a pension often discourages individuals from saving independently. Most pension plans offer 40% to 70% of final salary, though some plans can approach 80% for high-tenure employees. However, while these benefits may cover day-to-day expenses, they don’t provide a liquid nest egg for emergencies. Additionally, some municipalities do not participate in Social Security, meaning retirees may not be eligible for Social Security benefits at all.
Pensions also complicate retirement planning, especially when comparing retirement readiness across populations. While future pension payments are a valuable asset, they’re not generally discounted to their present value in personal financial planning. Additionally, most pensions don’t include cost-of-living adjustments. While benefits are based on a salary that likely rose with inflation during employment, retirees must consider how far those dollars will stretch over the next 20 or 30 years. For example, a pension of $100,000 annually may seem generous today, but with inflation, that same amount might only cover half as much 30 years from now. Since 2000, prices have risen by about 86.67%, according to the Bureau of Labor Statistics, underscoring how inflation erodes purchasing power over time.
If you’re entitled to a pension, it’s still wise to save independently—whether through a 457 plan, an IRA, or a brokerage account. We generally recommend saving 10% to 15% of your salary, but ultimately, the goal is to save as much as you can. If your 457 plan includes an employer match, that’s free money you’d otherwise leave on the table. If eligible, consider a Roth IRA funded with after-tax dollars for tax-free withdrawals in retirement. A brokerage account can offer flexibility and favorable capital gains tax treatment compared to the ordinary income tax applied to pension payouts.
Pensions are a valuable benefit but can complicate retirement planning. Not every employee retires as a top-ranking official, and high-risk professions—like police officers and firefighters—may require career changes as workers age or family priorities shift. While pensions can provide stability, they shouldn’t replace a proactive, diversified retirement strategy.
If you have questions on how your pension benefits fit into your overarching financial plan, the experts at Henssler Financial will be glad to help:
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- Email: experts@henssler.com
- Phone: 770-429-9166
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