If You Have a Pension & Social Security, Watch This Before You Claim transcript

What's the most common thing that I hear from people that are retiring with both a pension and social security? Well, I think we're fine. I just want someone to reconfirm our plan. And that confidence, well, that's exactly where the risk lives. Because having a pension and social security doesn't make retirement simple. It actually creates one of the most consequential decisions that you'll ever make. Because now it's not necessarily about whether you can retire, it's about how you structure your income, your taxes, and your timing.

And at some point before you retire, someone is very likely going to sit you down, hand you a form, and ask you to choose your pension options. And the data shows that most people make that decision in under 30 minutes without ever seeing the full picture. So, this video is about making sure that you see it clearly, especially if you are retiring with both a pension and social security. If you're new here, my name is Brandon Clark.

I'm a certified financial planner and certified private wealth advisor, and I help pre-retirees retire with confidence and stay wealthy with intention. Now, if you're one of the lucky few with a pension and social security, it means that you have the foundation. The real work is in how you sequence the income, protect it from inflation, manage the tax picture, and if you're married, make sure that your spouse is protected if you do pass away first.

So, in today's video, I'm going to show you exactly how to get all four of these right. And if you have a government pension, I'm also going to cover a major 2025 law change that may have significantly increased your social security benefit. And it's a law change that not a lot of people know about. So, let's get into it. I want to start with a reframe because most pension holders are unknowingly underselling what they have.

When people ask, "Are you on track for retirement?" the conversation almost always goes back to account balances. And if your 401k looks modest compared to what you've read online, maybe even YouTube comments, or what Suze Orman says that you need, it's easy to feel behind. But that completely ignores the value of guaranteed income. And there's a common planning benchmark that you very likely heard of, the generic 4% rule.

It suggests that a million-dollar portfolio generates roughly $3,300 a month is sustainable for retirement. And by that measure, a $3,300 monthly pension is economically equivalent to having a million dollars saved. And if you tried to recreate that same guaranteed income stream by, let's say, purchasing an annuity on the open market, you'd pay hundreds of thousands of dollars for that annuity. And that's what your pension is worth.

It's just already paid for. You can never outlive it, you can never lose it in a downturn, and never have to manage it. Now, add social security on top of that, and you have a foundation that most people spend their entire careers trying to build. So, a pension isn't a lack of savings, it's wealth that shows up as income instead of a balance. But here's also something that a lot of people missed. Even though guaranteed income is great, it has a vulnerability that a well-invested portfolio does not, inflation.

I sat down with a retired aerospace executive a couple years ago, and I'll call him David. He retired at 62 with a $4,200 monthly pension, no cost of living adjustment. He felt completely set, and he just wanted a second opinion. When we modeled what $4,200 would be worth at age 82, assuming just a 3% inflation increase, it came out to about $2,300 in today's dollars. Same income, but half the purchasing power. Healthcare goes up dramatically at this stage in life, property taxes had increased over the years, insurance was higher, and his pension hadn't changed at all. it just quietly erodes over time.

That's inflation. Now, most private pensions have no cost of living adjustment. Some offer a 1 to 2% increase, but how it actually gets calculated matters much more than people realize. So, a simple COLA applies to your original benefit every year. But a compounding COLA applies to the prior year's benefit, just like compound interest, and the raises build on each other over time. The difference between simple and compounding can add tens or even hundreds of thousands of dollars over a 30-year retirement.

So, you really should know which one you have. And this is one of the main reasons why social security becomes so valuable over time and why delaying it matters more than most people think. Social security's annual COLA is compounding. So, the longer you've been receiving it and the higher the benefit that you started with, the more those increases are worth in real dollars. So, a larger social security benefit compounding over 20 or 25 years is genuinely meaningful, especially as your pension's purchasing power quietly erodes beside it.

So, the pension is the foundation, and it's a very strong one at that. But the rest of your plan needs to be built around what it can't do. And so, the most powerful way to address that vulnerability, well, it's getting your income sequencing right. And a lot of people never think about it in this way. If you're watching this, it's likely that you have two guaranteed income streams, your social security and your pension.

Now, most people assume that those start around the same time, but they don't have to. And the order that you turn them on can have massive implications long-term. So, here's the key insight. Your pension is usually fixed once you reach a certain age, let's say, age 65. But social security is different. Every year you delay past 62 up until 70, your benefit grows by roughly 6 to 8% guaranteed, permanent, and inflation-adjusted.

Now, I can already hear some of you bringing up the trust fund depletion concern with social security, and that's a fair point. And I'm actually going to dedicate a video on why that likely won't be the issue for most people long-term. But for today's discussion, we're treating it as guaranteed income because for planning purposes, that is the right assumption to work with. So, if your pension can cover most of your core expenses, you may be able to use it as a bridge, letting social security keep growing until it becomes a much larger inflation-protected income stream for the rest of your life.

So, let me put real numbers to it. Let's say you retire at 62, and your pension is 3,200 a month. Your monthly expenses are 5,500, and that's a $2,300 gap not accounting for taxes. So, option A, claim social security at 62, say, $2,100 a month. The gap is pretty much closed at this point. Now, option B, you wait until 70, and your benefit grows to roughly 3,700 a month. During those 8 years, you draw $2,300 a month from your investment account to bridge the gap, so about $220,000 total.

And if you have a sizable investment account, that withdrawal rate actually looks quite reasonable. So, if we go back to using that same 4% withdrawal rule, any portfolio above 690,000 makes that an entirely prudent withdrawal rate. And at age 70, your guaranteed income is 6,900 a month against 5,500 in expenses, so there's a surplus every month for life. And because social security is inflation-adjusted, it keeps growing while the pension has likely stayed flat.

So, option A would have been quietly losing ground the entire time. Now, it's a given, but of course, all of this depends on your situation, and there are definitely reasons to claim early. But if longevity is on your side, the math says otherwise. Now, here's where this gets even more powerful, and it connects directly to taxes. That 8-year gap before social security starts is also the best tax planning window of your entire retirement.

It's also known as your golden tax window. During this window, you have pension income, but no social security and no RMDs yet. Your taxable income may be lower than it will ever be for the rest of your life. And that's your Roth conversion window. And if you do it right, converting portions of your IRA during those years, it can reduce your lifetime tax bill by six or even seven figures. Well, why? Well, because when RMDs hit at 73 or 75 on top of a pension and social security, you don't want a $2.5 million IRA adding fuel to that fire.

And most people never connect these two decisions. The sequencing strategy and the tax strategy are really the same strategy. Now, before we get to the pension election, I want to go back to that 2025 law change that is worth knowing about. And if you have a government pension, it may have already increased your social security benefit. And if you don't, well, it's a reminder of exactly why the sequencing we just covered matters so much.

So, either way, it's worth 60 seconds. So, in January of 2025, the Social Security Fairness Act was signed into law, and it eliminated two provisions that had been on the books for nearly 40 years. The windfall elimination provision and the government pension offset. So, these prior rules had reduced or even in many cases completely eliminated those social security benefits for people who had received a pension from a job that wasn't covered by social security.

So, think teachers, firefighters, police officers, basically federal employees. And the data says that over 2.8 million people were affected. Now, under the old rules, your social security benefit could be significantly reduced, sometimes all the way to zero, simply because you also had a pension. But that's gone now. Benefits have been recalculated, and some people are seeing increases of several hundred or even thousands of dollars a month retroactive back to January of 2024.

This new law doesn't apply to everyone. If your pension came from an employer that withheld social security taxes, the WEP and GPO never affected you. But if you were told your benefit would be reduced because of your government pension, or if you never applied because you just assumed it wasn't worth it, that calculation may have completely changed. And this isn't just about your own benefit. The GPO specifically targeted spousal and survivor benefits, and more than 70% of people affected by the GPO had their entire spousal or survivor benefit reduced to zero.

So, if your spouse never applied for those benefits because the GPO made it basically pointless, it's definitely time to revisit that. This may come as a surprise, but social security is not going to come knocking on your door to tell you about this new law change. The responsibility is on you to apply. So, my suggestion, don't wait. Now, if none of that applies to you, everything else still does because the next decision affects every pension holder equally and it's the most permanent one that you'll make in retirement.

So when you retire, your pension will ask you to make a choice. It's often presented as a form with a few options and a deadline. Most people think there are just two options. Take the single life benefit which pays the highest monthly amount and stops when you die or take a reduced joint and survivor benefit which pays less every month but continues to your spouse after you're gone. But there's often a third option that doesn't get nearly enough attention, a lump sum.

Some pensions will offer you the ability to take the entire value as a one-time lump sum and roll it directly into an IRA. And depending on your situation, that option can actually be the most powerful of the three. So if your pension has no cost of living adjustment, the lump sum deserves a very serious look. Most pensions will give you a break-even calculation. How long do you need to live to come out ahead taking the monthly benefit versus the lump sum?

Well, if that break-even is pretty far out, let's say in your 80s or even beyond, well, rolling the lump sum into an IRA gives you immediate control over a significant pool of capital. You can invest it, grow it, use it for Roth conversions, and even pass whatever remains to your heirs. Now on the other hand, if your pension includes a compounding COLA, the math usually tilts towards taking the monthly benefit and the break-even may be a lot sooner than your 80s.

The point is that an inflation-adjusted pension is genuinely valuable later in retirement and giving up that monthly income for a lump sum is usually much harder to justify. So this is a simple framework to use. If you have a COLA pension, the monthly almost always wins. No COLA and a distant break-even, well, the lump sum rollover deserves a serious conversation. Now assuming that you're taking the monthly benefit, the next decision is how to structure it.

And this is where most people default without thinking it through all the way. Anytime I think about survivor benefits in a pension, I'm reminded of this story. So a few years ago I got a call from a potential client. I'll call her Karen. Her husband had retired the year before and he chose the single life pension option to maximize income for retirement. He was healthy, they had savings, and in the moment, it felt like he was making the right decision.

But he passed away unexpectedly in a car crash at 68 less than a year later. And what happened? Well, the pension, it was gone. But between the income drop and filing taxes as a single filer and higher Medicare premiums, her entire financial picture changed overnight. They didn't make a reckless decision, they just never fully modeled what would have happened if he went first. So think of the joint and survivor option this way.

It's essentially buying insurance through your pension. You're paying a monthly premium in the form of a reduced income in exchange for a guaranteed payout to your spouse if you pass away first. And let's use math. So let's say the full benefit's 4,500 a month. The 50% [snorts] joint and survivor option drops that to 3,600 a month. So you're paying a $900 a month premium, about 10,800 over a year for that coverage. So if you pass at 75, your spouse receives 1,800 a month for the rest of their life.

So that's one way to look at it as though the survivor benefit is like paying for insurance. Now consider this. What if you took the full $4,500 instead and used that same $900 a month to fund a life insurance policy outside the pension? Well, depending on your age and your health, that could mean a substantial tax-free death benefit received income tax-free to your spouse with full flexibility over how it's used. And the insurance approach gives your spouse options to invest it, use it for health care, or even pass it on.

So the pension survivor benefit is fixed forever the day that you sign. Now this approach, sometimes called pension maximization, doesn't work for everyone. Your health issues, insurability, and age gaps all affect whether the math holds up. The point is that most people make this election without ever seeing the full comparison, without realizing they're buying insurance, and never asking if maybe there's a better policy.

The point being is that this decision is permanent. There is no undo. And that alone is a reason to give it more than 30 minutes. But there's one more thing. Even if you get the pension election exactly right, there's a scenario almost every retirement plan ignores. And when it happens, the financial hit is almost always worse than the surviving spouse expected. What happens to your spouse's income the month after you die?

And I'm not asking to be morbid here. I'm asking because I've watched this play out more times than I'd like. And the financial hit is almost always worse than anyone had expected. So here's what typically happens all at once. The smaller of the two Social Security checks disappears. It's gone immediately. The surviving spouse keeps the higher of the two benefits, but only one. So if you spent years building a larger Social Security benefit by delaying to 70, that higher benefit becomes the one that your spouse keeps for the rest of their life.

And this is one of the most overlooked reasons to delay Social Security. It's not just about your income, it's about the income your spouse is left with if you do go first. So the bigger the benefit you build, the bigger the floor that you leave behind. And going back to the pension, this depends entirely on the election that you made at retirement. And if you choose the single life option, it stops completely when you die.

If you choose the 50 or 75% joint and survivor benefit, it drops to that percentage. Only if you elected the 100% survivor option does it continue at the full amount. Once the deceased spouse goes, the surviving spouse now files taxes as a single filer, which means the same income gets taxed at higher rates with a smaller standard deduction, and potentially triggers IRMAA surcharges on Medicare that weren't there before, adding hundreds of dollars per month in premiums.

And the expenses? Well, the mortgage didn't change, property taxes didn't change, and utilities barely moved. Income drops sharply, but expenses don't. And that's exactly what Karen was dealing with, all of it at the same time in the same month with lots of emotions, and the pension was gone. One Social Security check instead of two, a tax filing status that she didn't choose, and expenses that didn't move an inch. So this is where every retirement plan should model two scenarios with equal weight, life together and life as a survivor.

Not as a backup plan, but as a core part of your retirement plan. So if there's a gap in the survivor scenario, and there almost always is, it needs to be addressed before retirement through things like maybe life insurance, through Social Security timing, through how the pension election was made, through how assets are titled. So protecting your spouse isn't one decision, it's the sum of all the decisions that we've talked about today.

So going back to Karen, one month changed everything at once, not because of a bad decision, but because of a default decision. Nobody ever sat them down and showed them the full picture before they had signed that form. And that's what this is all about, pension valuation, inflation exposure, income sequencing, the Roth conversion window, the pension election, the survivor income gap. These aren't separate topics, they're all connected together and every piece affects the others.

So the framework that my firm uses to walk clients through all of this is called the Profit Process. It's built specifically for pre-retirees with real complexity, people who want their retirement to be as intentional as the career that built it. So if you're within 5 to 10 years of retirement sitting on a sizeable retirement account and a pension, and you've never had someone model the full picture, well, that's exactly what this conversation is meant to do.

You can use the link in the description and we can schedule a time together. If you found this video helpful, please feel free to subscribe. Most viewers are not subscribed and we publish content like this every week for people who want to retire with confidence and stay wealthy with intention. Thank you so much for watching and I will see you in the next video. >> [music]