How a Pension Impacts Your Retirement – How You Can Retire With or Without a Pension

Will you have a pension plan to help fund your retirement dreams? A defined benefit pension plan can make a huge difference in your retirement planning. We’ll take a closer look at how a pension affects your retirement, and what you can do to create regular income streams if a pension will not be part of your retirement plan.

Disclosure: This article is part of the #LifeUninterrupted campaign sponsored by USAA, designed to help future retirees learn how to transition into retirement without worrying about financial interruptions. You can receive a free, no-obligation retirement review today by calling USAA. Note: We are receiving a fee for posting; however, the opinions expressed in this post are my own. I do not earn a commission or percentage of sales.

I have been paying much more attention to retirement planning over the last few years. My wife and I are still about 20 years from the traditional retirement age, which still gives us plenty of time to prepare for retirement. But I also want to make sure we do everything we can to cover our future spending needs.

That is why we are planning now. The more we prepare today, the less ground we will have to make up later. And I’m sure our lives will become more complicated (and expensive!) as our children get older.

Right now, our retirement savings include our investment accounts, such as our IRA and 401k plans, and a taxable investment account with some index funds. Together, these accounts should help fund our retirement.

We also hope to add Social Security benefits and a military pension to our retirement income one day. So far, I have about 12 years of military service, which means I still have about 8 more years before I will be eligible for military retirement benefits. Since I serve in the Air National Guard, I won’t be eligible for retirement pay until I reach age 60.

Overall, I would say we are on track to retire.

How a Pension Impacts Your Retirement Planning

A pension plan is a retirement account that pays the recipient a monthly income during retirement. Pensions were once common because employees often worked for the same company for most of their adult lives.

However, in recent years, pensions have largely disappeared from the corporate world and are becoming rarer outside of government, public service, and military occupations.

Benefits of Having a Pension

Pensions provide a steady income during retirement. Some pensions offer a fixed monthly payment for life, while others, like military retirement pay, may offer an inflation-indexed pension that increases with inflation. The latter helps maintain your spending power as inflation erodes the dollar’s value.

Having this fixed income stream each month is incredibly valuable for retirement planning. This lets retirees build a stable budget and, if they are fortunate, fund all of their retirement spending from their pension, Social Security checks, and other regular income streams.

While pensions make retirement easier, you can still retire without one. We’ll look at this in a moment.

Since most of us reading this article are current or former military members, we’ll look at how you can use your service to earn a pension that can provide income for the rest of your life.

4 Ways to Use Your Military Service to Earn a Pension

There are several ways to use your military service to earn retirement benefits. These include:

• Active Duty Retirement
• Guard/Reserve Retirement
• Civil Service Retirement
• Retirement from State & Local Government or Other Agencies

Active Duty Retirement Pay

Most people think of retiring from active duty when they think of military retirement pay. Active duty members can retire after 20 years of service and begin receiving military retirement pay the month after they retire. In some cases, veterans can retire as young as 38 and receive military retirement pay and health care for the rest of their lives.

Military retirement pay is also indexed for inflation, meaning the payment amount increases with inflation. This can have a large and lasting impact on your retirement pay.

Guard or Reserve Retirement Pay

Members of the Guard and Reserves can retire after 20 good years of service. Reserve retirement benefits are about the same as active-duty retirement benefits. However, they are not eligible for military retirement pay or health care until age 60 (unless their military service qualifies them for early retirement benefits).

As a current member of the Air National Guard, I hope to retire after 20 years of service and begin receiving retirement pay at age 60.

Civil Service Retirement

Active Duty military veterans who later join the Civil Service can buy back military service credits to increase their Civil Service retirement benefits. This is an excellent way to increase your Civil Service retirement benefits based on the military service you have already completed.

Additionally, members of the Guard or Reserves who also serve in the Civil Service and buy back their military service credits can double-dip and use their active-duty military service toward a Reserve pension as well as a Civil Service pension.

Federal law, however, prohibits active duty retirees from counting their service twice.

State & Local Government & Similar Organizations

Many state and local governments and similar organizations also allow military members to receive retirement credit for their active-duty military service. This is common at many levels of state and local government, as well as in some first responder organizations, such as law enforcement and firefighting.

Many people in my Guard unit are working to earn full retirement benefits through the Guard and their civilian job. Some of these members are state employees, law enforcement officers, firefighters, EMTs, and other local government employees.

Check with your employer’s Human Resources office for more information about applying military service toward your retirement benefits.

How to Create Your Own Retirement Income Streams

Earning a pension is just one of many ways to fund your retirement. And many people prefer pension plans because they offer a steady monthly income stream.

However, you can still create additional income streams to fund your retirement. These tips apply whether or not you have a pension.

These include Social Security Benefits, dividends, bond payments, interest, annuities, withdrawals from investment accounts, rental properties, and more. Let’s take a closer look at these.

Social Security Benefits

Many Americans will be eligible for Social Security Retirement Benefits when they reach retirement age. While this isn’t designed to be your sole source of retirement income, its steady cash flow and annual cost-of-living increases can go a long way toward funding your retirement.

Coupling Social Security benefits with a pension can often cover most of your living expenses.

The good news is that military members who served prior to 2001 may see an increase in Social Security Benefits based on their service time.

Dividends

Some stocks pay dividends, cash distributions from the company to shareholders. These payments can go directly to your investment account or be reinvested for added portfolio growth.

I currently reinvest my dividends for added growth, as I still have about two decades before reaching the traditional retirement age. However, I expect to eventually stop reinvesting dividends and withdraw the payments to help cover living expenses.

Review your current investment portfolio to estimate your annual dividend income and determine how it will affect your retirement income. It takes a substantial investment portfolio to live entirely off dividend payments. However, regular monthly, quarterly, or annual dividend payments can improve your quality of life and reduce how much you need from other sources.

Bond Payments & Interest

Bond payments also provide regular income that you can reinvest or use for current living expenses. Municipal and Treasury bonds tend to be lower risk than corporate bonds and can help reduce portfolio risk and smooth returns.

Interest is another component of many retirement portfolios and can be earned from savings accounts and certificates of deposit (CDs). Many retirees keep a portion of their near-term spending needs in interest-bearing savings accounts or CDs to have ready access to cash. Money held in stable accounts also reduces sequence-of-returns risk and supports a more stable long-term investment portfolio.

Annuities – Setting up an Income Stream for Life

Annuities are insurance policies that provide investors with regular monthly payments, often for the rest of their lives.

To purchase an annuity, an investor makes a lump-sum payment to the annuity firm and, in return, receives regular payments for the rest of their life.

Annuities can also be purchased through the Thrift Savings Plan and through some other organizations. Please do your research before buying an annuity, as there are many types of annuities with differing levels of complexity and fee structures. Some offers are better than others. It always pays to shop around for the right annuity.

Withdrawing from Investment Accounts

I am currently in the accumulation phase of my investing career, meaning that I am not spending my investments. I am working to save and invest as much as possible and reinvest any additional growth our investments generate.

However, we will eventually reach the spending phase and begin making withdrawals from our retirement accounts.

Determining how much you can withdraw from your investment accounts without running them dry is a much-discussed topic. But research shows most portfolios can sustain a 4% Withdrawal Rate each year. These studies use historical records and various simulations, but as we all know, past performance doesn’t guarantee future results.

You may wish to work with a financial planner to help you determine how much money you can safely withdraw from your investments each year. You can schedule a free retirement review with a USAA financial planner.

Rental Properties

I know many real estate investors whose rental properties generate enough monthly income to live a comfortable life, and even provide extra cash flow to fund additional activities or investments.

Getting started with real estate investing is outside the scope of this article. However, it can be a good way to generate positive monthly cash flow that can help support, or possibly even fund your retirement.

Putting This All Together

As I mentioned, my wife and I are still in the accumulation phase of retirement planning. We have made good progress and we will continue to save and invest until we reach retirement age. And hopefully, I will be able to earn retirement benefits through the Air National Guard. If so, the military retirement pay and health care benefits will go a long way toward helping us achieve a financially sound retirement.

We are also building out other investments, such as contributing to our 401 (k) plans and IRAs. These accounts will continue to earn dividends and interest, which we will continue to reinvest until we decide we are ready to retire and start drawing down our retirement accounts to fund our retirement.

We also anticipate receiving Social Security Benefits when we retire, though we can’t predict the future or any changes that may happen to the program.

Overall, we believe we are on track to retire at a reasonable age, and possibly a little early.

Are You on Track to Retire? Free Retirement Review at USAA

I’m a firm believer in taking control of your future. That’s why my wife and I started saving for our retirement over a decade ago. But it’s also never too late to start.

Right now, USAA is offering a free, no-obligation retirement review with one of their retirement advisors. There is no cost, and you do not need to be a USAA member. To learn more or schedule a call, visit the USAA website.

I recommend everyone have a retirement plan review, regardless of age or how much money they have. Taking an hour out of your day today can deliver an immense return on investment and help you understand what you need to do to achieve the retirement you dream of.

You can get started now at USAA.