If you’re one of the few American workers with a traditional pension, your retirement strategy may differ from your peers.
According to the Bureau of Labor Statistics, only 14% of U.S. workers were covered by a defined benefit pension plan as of March 2025. (1) These plans are more common among government employees and retirees.
In fact, according to Congress, nearly 86 percent of state and local public sector workers have access to such pensions. (2) According to the Federal Reserve, 56% of retirees reported receiving pension income in 2024. (3)
Depending on your age and employer, a defined benefit pension can significantly impact your retirement prospects. Guaranteed monthly income provides stability, but also brings unique considerations for tax strategies and estate planning.
Here’s how you can adjust your retirement strategy.
Unlike withdrawals from a 401(k) or IRA, pension income is usually fixed and cannot be adjusted. According to the IRS, each pension payment is considered ordinary taxable income – potentially increasing your tax liability and affecting the amount of tax on your Social Security benefits.
Because pension income counts toward your modified adjusted gross income (MAGI), it may also put you over the threshold for Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) surcharge, resulting in higher premiums.
Depending on where you live, state taxes may also apply. Only 15 states completely exempt pension income from state taxes, according to AARP. (4) Check your state’s tax laws to see if there are any exemptions or deductions that could reduce your tax burden.
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Many employer-sponsored pension plans offer a choice between a one-time lump sum payment or lifetime monthly payments (annuity). Deciding between the two can be complicated.
Annuity options provide guaranteed monthly income, providing long-term financial stability. Most private sector pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), which guarantees payments up to certain limits if the employer becomes insolvent.
In many cases, you can also choose a survivor benefit to continue payments to a spouse or beneficiary after your death.
A lump sum, on the other hand, gives you complete control over your money, allowing you to invest it – potentially earning a higher return. It also makes it easier to leave unused funds as a legacy. However, it comes with the risk of market fluctuations and the possibility of using up your savings.
Traditional pensions are becoming increasingly rare, but if you join a defined benefit scheme you have the valuable advantage of a guaranteed retirement income.
However, a steady income can complicate other key decisions — like when to collect Social Security, where to live, how to manage your tax obligations and what to leave for your heirs.
Working with a financial professional can help you weigh these factors, balance competing priorities, and get the most out of your pension.
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Bureau of Labor Statistics (1); Congress.gov (2); Federal Reserve (3); AARP (4).
This article provides information only and should not be considered advice. It is provided without any warranty of any kind.