One of the most common concerns among retirees is running out of money. That’s understandable given the consequences of doing so. Pensions can alleviate a large portion of that risk and its associated fear.
If you can find a job that meets all your criteria and provides a pension, that is great. But as a financial advisor, I don’t think you need to stress yourself about finding a job that offers a pension. With proper planning, you can have a perfectly successful retirement without a pension. Here’s how.
[READ: 9 Jobs That Still Offer Traditional Pensions]
What Is a Pension and How Common Are They?
Pension plans are a type of employer retirement planned. They are also called defined-benefit plans because they provide just that: a known benefit at retirement. Contrast that with a defined-contribution plan like a 401(k) in which you set aside regular savings over time. You aren’t sure of the amount you’ll have available to withdraw in retirement because it depends partly on how much your investments grow.
Pension benefits are normally based on a formula made up of the length of time you worked with the employer, the salary you earned and sometimes additional factors. Investment returns are not a factor. So, you can very closely estimate how much you’ll receive when you retire by filling in those variables with your estimates.
Pensions remain an admired retirement benefit, but they aren’t very common among private-sector workers. While state and local workers overall had much greater access to these plans, only about 15% of private-sector workers had access to a pension plan in 2022. That may sound like bad news, but the positive aspect here is that there are plenty of people out there currently — or well on their way to — enjoying retirement who aren’t covered by a pension.
[Read: How to Find a Lost Pension Plan.]
If You Aren’t Covered by a Pension, How Can You Save for Retirement?
Pensions are a good tool. But they are only one of several that you may have available. You also have your own savings and most likely Social Security. Here’s what to know about these non-pension retirement savings tools.
Employer-Sponsored Retirement Plans
Defined-contribution plans such as 401(k)s and 403(b)s form the foundation for many people’s retirement. There may be more uncertainty with these plans than with a pension, but that doesn’t mean they aren’t good. Planning ahead and using reasonable estimates for how much you’ll save and how much the money will grow can go a long way toward ensuring you are ready for retirement.
Employers often match your contributions on these plans as well, giving your savings a significant boost.
As you compare job offers, consider how generous the matching provisions are. A common approach many employers take is to provide an equal match on your contributions up to a certain percent of your salary, followed by a lower match on additional contributions. For example, one employer may match you dollar-for-dollar up to 5% of your salary, and then 50 cents on the dollar for the next 5%. That means if you save 10% of your salary, your employer will add another 7.5% of your salary into your account.
Maximizing Social Security
If you are covered by Social Security, like most workers are, you already have a pension. Social Security benefits are based primarily on how much you earned during your working years and the age at which you file. Like a private pension, you can estimate your benefits and take steps to maximize them with planning and careful consideration. The most significant decision you’ll have concerning your benefits is the age at which you file. If you file before your full retirement age your benefits will be reduced, but you can increase them by 8% per year for delaying (up to age 70).
You will likely find that your Social Security benefits alone won’t support your desired retirement lifestyle, but they can provide a solid foundation of inflation-protected, secure income that is guaranteed for life.
[Read: What to Do With Your Pension Fund When You Retire]
Plan Ahead for Retirement
For most, the major drawback of saving for retirement through defined-contribution plans rather than a pension is the uncertainty. The key is to plan ahead and use reasonable estimates.
Here’s a simple example of what that might look like.
Say you’re 35 and plan to retire when you’re 65. That’s 30 years of saving. After considering your budget, combined with your employer’s matching contributions, you’ve decided you can comfortably add $15,000 per year to your retirement account. Depending on your risk tolerance and investment projections, you might have:
— $996,582 if your investments grow at 5% per year
— $1,416, 911 if your investments grow at 7% per year
— $2,044,613 if your investments grow at 9% per year
Deciding how much you are comfortable withdrawing from your account is something you’ll have to explore, but a common starting point is 4%. Combining your planned withdrawals with your estimated Social Security benefit will give you an idea of what to expect. You can track your Social Security earnings and get an estimate from the Social Security Administration website, but the average is about $1,900 per month to give you a reference point.
You’ll want to account for factors such as inflation and taxes, but this example shows you that there is plenty of room for a good retirement even if you don’t have a pension.
Do I Need a Pension?
Pensions are great, but not necessary for a good retirement. As long as you plan ahead, monitor your progress and take the necessary steps to ensure you stay on track, you can enjoy a comfortable retirement.
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Ask a Financial Pro: I’m Worried About Saving for Retirement. How Important Is It to Find a Job That Offers a Pension? originally appeared on usnews.com
