Redefining Your Asset Allocation and Life Insurance Needs with a Covered Floor

If you have a pension, you are fundamentally not playing the same retirement game as everyone else. Your pension provides a stability that can allow you to take far less risk, or significantly more risk, with your liquid assets—and still sleep like a baby.

Your Pension is a Bond: Redefining Your Asset Allocation

When you receive fixed payments every month, your pension is financially equivalent to a bond allocation within your overall portfolio. You can actually calculate the Net Present Value (NPV) of your pension.

• Example: A pension that pays $60,000 a year for life might represent the equivalent of a $1 million bond portfolio, depending on your age and prevailing interest rates.

This calculation fundamentally reshapes your true asset mix:

• Scenario: If your investment accounts total $1 million and are 100% stocks, but your pension is worth $1 million (NPV), your actual retirement portfolio allocation is 50% stocks / 50% bonds.

This covered floor gives you powerful options:

• If you are conservative: Your pension might already cover most of your income needs, meaning your liquid investments can sit tight with very little risk.

• If you are aggressive: You can lean into stocks and chase higher goals, knowing that short-term losses won't hit your core lifestyle in the same devastating way it would for other retirees.

Retirees with pensions truly sleep better because they know their floor is covered.

The Biggest Choice: Single Life vs. Joint & Survivor

One of the most important decisions you will face is how to structure the payout: Single Life vs. Joint and Survivor (J&S).

• The J&S Choice is Life Insurance: Choosing a joint and survivor option is essentially like buying an expensive life insurance policy. You are paying for the guarantee that your spouse continues to receive income if you pass away first.

• Run the Math: If you are retired and already have a strong liquid portfolio, Social Security, and other assets, you often don't need additional life insurance. I recommend running a rigorous analysis to look at the worst-case scenario (e.g., dying on day one of retirement).

• The Comparison: Compare the cost of the J&S option (the reduction in your monthly benefit) against the cost of buying a comparable term life policy for the same amount of time. In many cases, the math shows that the Single Life Option is more efficient, especially if your other assets already cover your spouse's needs.

Every situation is different, but this choice deserves a careful, mathematical look.

The Psychological Advantage and Its Trade-Offs

A pension creates a huge psychological difference in retirement spending compared to living off investment accounts.

• Peace of Mind: With a pension, you never see the market swings. All you see is a steady paycheck. This makes retirees feel more confident in their spending and allows them to enjoy retirement more day-to-day. Retirees relying solely on investments often underspend due to constant anxiety over a dropping balance.

• The Trade-Off (Flexibility): The downside is flexibility. In the early years of retirement, when you might want to frontload big ticket items like travel or home renovations, the fixed nature of the pension limits your ability to access large lump sums that investment accounts readily provide. Once you choose your payout, it's locked in.

Conclusion: Options and Stability

A pension doesn't just provide peace of mind; it reshapes your asset allocation strategy, impacts how you think about life insurance, and positively changes your psychology around spending. It gives you options and stability that retirees without a pension simply do not have.

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you structure your pension payout and portfolio risk.