The ultimate guide to factoring your pension into your retirement plan

The crux of retirement planning is figuring out how to turn a pile of money into a steady stream of future cash flows. Easier said than done. It’s made even more complicated when you throw other cash flows into the mix, like a pension or disability payment.

Mo’ money, mo’ problems

The ideal retirement withdrawal strategy meets the following criteria:

1. It provides a steady lifestyle via inflation-adjusted future payments.
2. Automatically steps up the withdrawal rate as your investment horizon wanes.

According to pensionrights.org, 91% of pensions aren’t adjusted for inflation. As inflation increasingly takes its bite out of your pension, you’ll want to keep some extra funds laying around to patch over the periods both before and after your pension begins.

In other words, the goal is to utilize retirement savings to even out the sharp edges of our future income stream, like spreading sand over a rocky path.

Figure 1: An illustration of the components of cash flows of someone retires at 55

Let’s first examine the case of a 50-year-old who wants to retire at 55, but doesn’t…