How Much Should I Invest If I Have a Pension?

July 13, 2023

In this highlight, Brian and Bo discuss how much you should be investing when you have a Pension.

Check out our Know Your Number course to help you on your wealth building journey!


Let’s go to Stetson’s question. You guys and others like Dave Ramsey have mentioned people with pensions and how we should still be saving, but I can never feel super clear on how much I should be saving. I’m currently throwing around 25% into a Roth, and Lord willing, I should have a military pension in less than 10 years. Is 25% enough, or is it too much since he knows this is coming? What do you guys think?

Yeah, this is a question we get all the time. Hey, I’ve got a pension, and I’ve got some guaranteed income that’s supposed to be there when I retire. Does 25% still… does it still… is it still the number that I need to hit? And one of the things we always talk about, Brian, is that not all pensions are created equal. A pension supported by a company is very different from a pension supported by the full faith and credit of the US government if you’re a federal employee. So, that comes into the calculation.

What I think is so interesting is that we just don’t know the future. We don’t know what the future is going to look like. So when I talk to pensioners who have nice guaranteed incomes or school teachers or folks like that, I say, you know what, even if you’re saving 25%, what it’s probably going to do is give you options sooner. Whereas normally, you might have to work till age 65 or till age 60. If you save 25% and you determine, man, okay, I want to learn.moneyguy.com. I did the Know Your Number course. I know my number. I know what my income is going to be. I know how much I can get from my pension, and I know what I need to save for. Man, I thought I was going to not do it until 65. I actually hit it at 57 or actually hit it at 55 or 53. I don’t think it’s crazy to save at that rate, as long as it’s not absolutely crushing you from a savings standpoint.

Well, this is a multifaceted question because I want to first of all, we put the 20-25% because I want you to challenge yourself while you’re young to have an army of dollar bills working for you at some point in the future. But pensions are one of those things where when you get to retirement, it’s going to impact you because the whole reason for saving and investing is to be able to pay yourself, to start consuming what you saved. If you have a pension that’s replacing 60% of your income, what you need to pull out of your savings and investments for cash flow will be much smaller. That’s why it comes into play. How much will you actually need in retirement for cash flow? If a lot of it is coming from a pension, that changes the scenario.

Always, and I know people, I know military people, both people have pensions coming in. They didn’t save a lot of money, but they have a great retirement. They’re the exception because the pensions are paying them such large sums of money. And then they usually got them because military pensions, especially for people who go into the military when they’re 18 years old, you put in your 20-plus years of service. You’re in your late 30s, early 40s when you actually qualify for taking these benefits. It’s uncommon. Like, I have a cousin who left the military full retirement, and now he’s doing contractor work for military organizations. He’s doing really cool stuff and making great money. He’s stacking. So, it’s… But I don’t think he’s behind because he didn’t save a ton while he was in the military. His pension is the reason. That’s why I want to bring it back to Stetson’s question.

I think when your income is less than $200,000 per household, you can look at how much of your income is being allocated for the pension, both from your pay and what your employer is contributing to fund that pension. That’s a part you need to consider when saving for your future because if you find out, like in county government, we did a forced savings of 8%, but the employer had to contribute an additional 14% because the pension was underfunded. So, if you think about it, that’s 22% of compensation. This person just needs to fund a Roth IRA, and they’ve probably already hit the 25%. That’s why when people ask what’s rich or wealthy, it varies depending on what you need. Someone retiring from the military might never save more than $500,000 to $700,000, yet they’ll still be financially secure because of their pension, which likely has a seven-figure value when calculated.

So, somebody on their net worth statement might only have $500,000 of investments, even though they’re in their 60s. Yet, they have a pension that provides cash flow benefits, allowing them to live comfortably. That’s why it’s important, and this is why we created the Know Your Number course. It’s not only a course, but also a tool to help you understand your retirement goals. You can find it at learn.moneyguy.com. This tool allows you to see where you are in the process, whether you’re ahead or behind the curve, and helps you make informed decisions.

I think it’s great to have pensionable income. It’s unique, and you should consider it as such because not everyone has that advantage. I don’t think we see pensions as frequently as we used to, but they can significantly impact your retirement plans. It’s crucial to factor in your pension when determining how much you need to save for retirement. And remember, the goal is to have options. Saving 25% may provide you with more flexibility and the ability to retire earlier than you originally planned. As long as saving at that rate doesn’t hinder your current financial situation, it can be a wise choice.

Furthermore, when it comes to pensions, not all are equal. Consider the source of the pension and its reliability. A pension backed by a company is different from one backed by the US government, such as for federal employees. These factors affect the calculations and decisions you make regarding your savings and retirement planning.

Ultimately, the future is uncertain. While pensions can provide a reliable income stream, it’s essential to have a diversified approach to your retirement savings. Take into account your pension, your other investments, and your desired lifestyle in retirement. Having a clear understanding of your financial goals and utilizing tools like the Know Your Number course will help you make informed decisions and create a comprehensive retirement plan.



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