Navigating Pensions and Retirement: A Guide for Couples Approaching Retirement

As you and your partner look ahead to retirement, understanding how pensions work—especially in terms of choices for the surviving spouse—becomes increasingly important. Many millennials might not have encountered pensions as a reliable source of retirement income, but they are often considered a cornerstone of financial security during retirement. So, why are pensions becoming less common, and what are the chances we’ll see them again in our lifetime?

The Shift Away from Pensions

Due to their higher costs for employers, pensions are becoming increasingly rare, especially among non-government jobs. Many workplaces now offer 401(k) plans instead. Typically, you may find yourself needing to choose between a pension or a 401(k). Understanding the differences and similarities between these options is essential for planning your retirement.

What Is a Pension?

Pensions generally refer to retirement plans, and they come in two main types:

Defined Contribution Plans 

In these plans, contributions come from you, your employer, or both. They may sound similar to 401(k) plans and rely on investment returns. 

Defined Benefit Plans

This is what most people mean when they talk about pensions. These plans provide guaranteed payouts during retirement based on a formula that considers your salary and years of service.

Comparing Pensions and 401(k)s

As pensions fade from the landscape, it's crucial to understand the implications of this change. The key distinction is that 401(k)s are defined contribution plans, while pensions are defined benefit plans.

401(k) - You contribute a set amount over your career, and you have control over how and when to withdraw those funds in retirement.

Pension - You receive guaranteed monthly payments for the rest of your life, which can provide peace of mind.

The certainty of lifetime income often makes pensions appealing. However, others may prefer the flexibility that comes with a 401(k), especially if their employer sees pensions as too costly.

Planning for a Successful Retirement

Both pension plans and 401(k)s have their benefits. If you have a 401(k), aim to contribute as much as possible, especially to take full advantage of your employer's match. If you’re drawn to pensions but your employer doesn’t offer one, consider discussing the potential benefits of such a plan with them.

Retirement planning can feel daunting, but staying informed about your options and any changes in the retirement landscape is vital. Consulting with a financial advisor can help you gain clarity on your finances and explore the best strategies for your retirement.

As you and your partner approach this exciting new chapter, understanding your pension options, particularly regarding survivor benefits, will be key to ensuring a secure future together.

Mike Kelly is the founder of Kelly Financial Planning, an independent, fee-only financial planning and advisory firm located in Cincinnati, Ohio and serving clients across the country. Through hourly services, Kelly Financial Planning provides hands-on financial guidance and education that is accessible to all.

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