Written by Today we’re answering a big retirement question: 401(k) or pension—what’s the better choice? It’s a question that trips a lot of folks up. Both have their perks and pitfalls, and choosing the right one can shape your entire retirement lifestyle. Let’s walk through what I’d personally ask myself—and what you should consider—before deciding.
Understanding the Basics
- 401(k): A defined contribution plan. That means you put money in (and sometimes your employer too).
- Pension: A defined benefit plan. That means you’re promised a certain amount in retirement, usually based on your salary and how long you worked.
I like to remember it like this:
- Contribution = what you put in
- Benefit = what you get out
Let’s walk through the pros and cons of both, starting with the 401(k).
Pros of a 401(k)
1. More Control Over Investments
You choose where your money goes—stocks, bonds, mutual funds. That flexibility gives you control (and growth potential).
2. Employer Match
Many employers match your contributions. For example, if you put in 3%, they might match that 3%—an immediate 100% return.
3. Portability
You can take it with you. If you change jobs, your 401(k) can go too—either by rolling it into a new employer plan or an IRA.
4. Higher Contribution Limits
You can put in much more than you can in an IRA. For 2024, up to $23,500—and if structured right, even more through solo 401(k)s.
5. Potential for Growth and Inheritance
With wise investing, your account can grow significantly. And you can pass it on to heirs.
Cons of a 401(k)
1. You Take the Risk
Market crashes? You feel it. You get the upside, but also the downside.
2. Requires Discipline
If you panic when markets dip and pull out your money—you could lose more than you save. You need a plan and the discipline to follow it.
3. No Guaranteed Income
Your 401(k) doesn’t promise you a paycheck for life. It’s up to you to create an income strategy.
4. Fees Can Sneak Up
Investment choices in many 401(k) plans carry fees. High turnover funds especially can eat away at your returns.
5. Withdrawal Strategy Is on You
You’re in charge of taking money out. How much, how often, and which accounts—it’s all your call.
A lot of people use the 4% rule or income-based withdrawals, but even those come with decisions and risks. I prefer the Three Bucket Strategy to balance safety, income, and growth.
What’s the Three Bucket Strategy?
You divide your money into three buckets:
- Bucket 1 (Conservative): 1–2 years of expenses in cash or equivalents.
- Bucket 2 (Moderate): 3–8 years of income-focused investments (like bonds, annuities, dividend-paying stocks).
- Bucket 3 (Aggressive): Long-term growth—stocks, real estate, business equity.
When markets are good, you sell from Bucket 3 to refill the others. When markets are down, you live off Buckets 1 and 2, giving Bucket 3 time to recover.
Pros of a Pension
1. Guaranteed Income for Life
Once you retire, you’ll get a regular check every month—no guesswork.
2. Less Stress
You don’t have to manage investments or worry about market swings.
3. Spousal Benefits Available
You can choose a survivor option so your spouse keeps getting checks after you’re gone.
4. Not Tied to Market Volatility
Market goes up or down—your pension payment stays the same.
5. Some Include COLA Adjustments
If you were hired before a certain date (like 2012 in Florida), your pension may increase with inflation.
Cons of a Pension
1. Lacks Flexibility
You can’t just take out extra cash for emergencies or big purchases. You get the same check every month.
2. You May Lose If You Leave Early
Most pensions require you to stay for 5–10 years to be vested. Leave early, and you may lose most or all of it.
3. No Inheritance Value
Once you (or your spouse) pass away, the checks stop. There’s no generational wealth transfer.
4. May Not Keep Up With Inflation
If your pension doesn’t include a COLA, inflation could slowly erode your lifestyle.
5. Fewer Employers Offer Them
Only about 10% of private-sector employers still offer pensions. They’re becoming rare.
How Pensions Are Calculated
Most use this formula: Years of Service x Pension Multiplier x Final Average Salary
In Florida, the multiplier is 1.6% for regular employees. So:
- 20 years = 32% of salary
- 30 years = 48% of salary
If your salary is $50,000:
- 32% = $16,000 per year
- 48% = $24,000 per year
So the longer you work, the bigger your pension.
So Which One Should You Choose?
It depends on you.
- Want guaranteed income and less stress? Pension.
- Want flexibility, growth potential, and generational wealth? 401(k).
Sometimes the best answer is both.
Many folks use pensions for their needs (housing, food, bills) and 401(k)s for their wants (travel, hobbies, extras).
Pension + Social Security = stability. 401(k) or other investments = freedom and flexibility.
And remember—65% of self-made millionaires have at least 3 income streams in retirement.
Final Thoughts
Your retirement plan should match your lifestyle goals—not work against them. If you’re stuck wondering whether to choose a 401(k), a pension, or how to balance both—you don’t have to guess.
🎯 Join me this Wednesday for a live, free workshop: The 5 Retirement Risks and How to Avoid Them
You’ll get:
- My 3-part framework for a worry-free retirement
- Free access to the Wealth Retirement Planner
- A chance to ask questions live
Spots are limited to the first 100 people—it’s a Zoom Room cap.
As always, I’m thankful for our time together. Until next time, stay safe and enjoy life.
— Dre Griggs, Obsidian Wisdom