Rich Girl Roundup: How Does A Pension Affect My Retirement Goals?

Katie: Welcome back, Rich Family, to the Rich Girl Roundup weekly discussion of The Money with Katie Show. As always, I'm your host, Katie Gatti Tassin, and every Monday Henah and I are going to dive into an interesting money question. But before we do, here's a quick message from the sponsors of this segment. 

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Katie: This week's upcoming main Wednesday episode is about the multibillion-dollar creator economy, and we're going inside the lives of career influencers. We are inviting a YouTuber who has 3 million followers on the show to talk about exactly how he makes money. He's gonna break down how much he earns, his business strategy. It is gonna be super interesting, so make sure you tune in for that on Wednesday. And in the meantime, Henah, tell me which body part would you sacrifice for a pension? 

Henah: Ooh. I think I would give at least a kidney, maybe up to a finger. 'Cause I'm trying to think of non-vital organs, but what about you? 

Katie: There you go. Yeah, I like where your head's at with that. I mean, man, I'd give a lot for a pension. I think that the degradation of the pension system is probably to blame for a lot of the financial hardship that people feel these days. So I'm excited to talk about this very sexy and fascinating topic. 

Henah: I think that it's kind of a sin, right, that we don't have it as much. So for everyone listening, I'm gonna unionize at Money with Katie. I'm gonna fight for a pension. Stay tuned. 

Katie: Love it. 

Henah: Hey, you want one too, okay? It benefits, it's a win-win for everybody. I can read today's question if you'd like. It is from Rachel K. They said, “I'm a state worker and my husband is a public school teacher. We will both have pensions. How do we factor this in when saving and planning for retirement?” And to that, I say, I am so jealous that I could cry. So while I'm sobbing, I will let Katie really talk a little bit about pensions. 

Katie: So planning for retirement. In the simplest terms, I think we can think about this like we're really just constructing other sources of income. So most of the time for most people a la me and Henah, the primary source of income is gonna be your own investments in the form of retirement accounts or brokerage accounts or savings accounts. Maybe you're gonna get hooked up with that CD ladder, like Grandma Jean, shout out last week's episode. Go back and listen to our episode about CDs. But you might have real estate income if you have cash-flowing real estate properties. We also rarely talk about it, but you're probably gonna have Social Security unless something really goes awry, which, wouldn't put it past our government. But you know, I don't like to plan for it. We'll put it that way. So I like to think of it as kind of bonus funds later rather than something I'm gonna… 

Henah: Surprise! 

Katie: …really hang my hat on. And last, you have pensions. Pensions used to be more popular than they are now, but they're very expensive for corporations to maintain. So it's really no surprise that they've fallen out of favor. But they used to play a really significant role in providing retirement income for people. 

Henah: Yeah. Talk to me for a second. What is the difference between the 401(k) and retirement strategies people are using today, versus the pension that used to be more available? Why is it such a baller account? 

Katie: It breaks down to the difference between defined contribution plans, which is in the name—contribution, you as the employer contributing. This is the 401(k), right? And defined benefit plans where the benefit that you're gonna receive is the part that's defined, like a pension. So it's really shifting the responsibility from the employer to the employee to plan for these things. And so for most people, when they're calculating how much they need to save, they're probably just gonna look at how much income they need to produce for themselves in retirement. And we have talked about ways that you can do that. You can look at your current spending, you can do projections for the future, but you're effectively looking at what your income in retirement needs to be. And then you're backtracking into, okay, how large does my portfolio need to be, then, in order to produce that amount of money? 

But for people with pensions, you have a semi-guaranteed source of income—we're gonna come back to the word “guaranteed” in a second—that can supplement how much you've saved. So it means that in order to calculate how this is going to change your investment goals and your savings goals, you need to know how much of your future spending is going to be covered by the amount that the pension is going to pay you. And of course, things like how long you're gonna stay in the job totally matter. 

I remember when my dad was ending his career, he worked the same company the entire time. He was one of the last employees that started in the 1980s that had a pension and was, at that point, 30 years in, where every incremental year you stayed, that pension went up by a not insignificant amount of money. So it becomes this trade-off of, okay, I'm already X years in. Should I stay and try to get that pension, or should I go and try to make more money elsewhere? For him, it made sense to stay, but everyone is gonna have to ask that question.

Henah: Now, Papa Gatti's living the rich lifestyle with that pension, right? 

Katie: He is. He's living it up. He's golfing all the time. He's looking at a boat. My man is living large. I'm very happy for him 'cause he was not in love with his work. We'll put it that way. He worked hard for that pension. 

Henah: Fun fact for people listening is our dads actually used to work at the same company at one point for a small period of time. What a small world. But when we talk about pensions, you said you wanted to mention something about the guarantee, the semi-guaranteed source of income. 

Katie: Yeah, I don't wanna be a doomer, but I do think it's important to state broadly as kind of background context for everything we're talking about that pensions can fail. There have been articles for years stating that public pensions are underfunded. There was a couple pension failures in the early aughts, I think United Airlines, Delta Airlines, I don't know why I can only think of the airlines. We'll put a list in the show notes where pensions that were supposed to pay out significantly more didn't. And that is a possibility. So I think when we think through these answers, it's always just keeping that element of risk in the assumption that, okay, I should get this, but there's always a chance I won't. So I wanna make sure that I'm not putting all my eggs in this basket. 

Henah: So you're kind of referring to it as Social Security, as like a supplemental bonus, a nice surprise, kind of looking at it that way. So you and I have talked about this. My husband has a pension, which when I said earlier that I would give my kidney for one, I have given my marriage to one to basically say, this is the world's longest con to see if I will benefit from this pension. And I also was trying to look up for our own retirement, how do you calculate what you're actually gonna get, and the math? That's Rachel's question as well for her and her husband. So how do you do the math? 

Katie: The short and simple answer is you basically are gonna use the 4% rule or an inverse of the 4% rule. So if you know the monthly amount that they're going to pay you, typically you're either gonna be told, hey, the pension is worth this much in a lump sum, or you're going to be paid out X dollars per month.

There's also typically, for example, Henah, when we were looking at your husband's, there are decisions about death benefits and survivor benefits. And so it's kind of this constant cost/benefit analysis of which path you wanna choose. And I don't think every single one is gonna work that way, but that is typically the mindset you're taking into it. So if you know the monthly amount that they're gonna pay you, you can subtract it from your existing spending numbers, and then because your portfolio needs to cover the rest, you multiply what's left over by 12 to figure out what that's gonna be annually, and then multiply that number by between 25 and 33, depending on your preferred safe withdrawal rate.

So if you're cool with a 4% safe withdrawal rate, you're gonna multiply by 25. If you're looking more between 2% and 3%, you'll multiply by 33. But effectively, you're just trying to figure out what is the pension not going to cover on a monthly basis that I am gonna be responsible for self-funding? So for example, if the pension is gonna pay you $2,000 per month, or maybe you're gonna get $2,000 between you, but you know that your monthly expenses are $5,000, we need to calculate how big our portfolio needs to be to produce the other $3,000 per month in income. And the answer to that question is about $900,000. Now, if we had to provide the entirety of our $5,000, our portfolio would have to be $1.5 million. So in that case, the pension is filling what is roughly a $600,000 gap. 

So that's kind of how I like to think about it in terms of messy long-term planning. And obviously you can get super in the weeds and there's very sophisticated projection software that you can use. And I know that a lot of CFPs can help you nail this down. But if you're doing the back of the napkin math and you're just trying to understand how much it's gonna offset what you have to save for yourself, then that is an easy way to do it. 

Henah: Yeah, that's actually really helpful. So now I can at least sit and do the math and figure out for myself and my husband, since this is a long con for the next 30-something years, how much do we need to plan to save between the two of us? So on behalf of Rachel and me and our partners, thank you. 

Katie: Absolutely. I think a couple last things to think about is, does the pension adjust for inflation? Are they going to give you more over time as the purchasing power of that money goes down? Are there options like the lump sum or death benefits? Are there things that you're having to decide? Because if so, you probably wanna take a more serious approach to determining what that's really gonna mean for you and what option is the best. And these are all just variables that you can tweak slightly. But I kind of think about it like a game of probabilities, really. And I like to be conservative, as in, I probably would, when planning, estimate smaller amounts than I'm being told just in case, because you don't wanna hit retirement and then be like, oh crap, I don't have enough because this pension is not as much as I thought I was, or I left that job earlier than I thought I was going to. Or market returns are bad, so my portfolio is smaller. You just never know. So I like to overshoot and then hope for the best. 

Henah: That makes sense. I guess in this situation, do you recommend maybe working with an hourly fee CFP or CFA and running the math and the different scenarios?

Katie: Yeah, certainly as you get closer. I think if you're in your twenties and you're a couple years into work and you're just trying to figure out what your save rate should be, I don't know that it's necessary to involve a professional and pay for their time. But I definitely think as you're getting closer and you're getting more serious about retirement planning and wanting to really make sure you're on track, absolutely. 

Henah: Cool. Well, thank you. 

Katie: Absolutely. That is all for this week's Rich Girl Roundup. We will see you on Wednesday to talk all things creator economy and influencers. Thanks for listening. Bye.