Kevin Dick
Posted on Dec. 22, 2025
A pension should be viewed as an asset. According to the Department of Labor, only 1 in 5 U.S. workers have access to a traditional pension plan. Of that group, just 1 in 3 contribute to an additional retirement plan alongside their pension. That’s less than 7% of all employed individuals in the U.S.[1]
Put simply, if you are fortunate enough to have access to a pension, you have a tremendous opportunity to get ahead of not only your peers, but the workforce as a whole. This article will explore investment strategies that serve complementary to your pension plan and can easily be implemented while you’re building your retirement nest egg during your working years.
Employer-Sponsored Retirement Plans
One of best ways to supplement your pension is by participating in an employer-sponsored retirement plan. We’ve published a separate article covering options related to this broader category known as Defined Contribution Plans (DCPs), which can be found here. Today, however, we’ll focus on the two most common retirement plans available to pension plan participants: 403(b) and 457(b) plans.
403(b) Plans are offered to employees of public schools, non-profits, and church organizations. These plans allow employees to contribute a portion of their pre-tax salary, with investments growing tax-deferred until withdrawals are made. Employers may offer matching contributions, though they’re not guaranteed.
For 2026, the contribution limit for 403(b)s is $24,500, or $32,500 for participants age 50 or older.
457(b) Plans are offered to many of the same tax-exempt organizations as 403(b)s, with the exception of church organizations. In a 457, employees defer compensation which is deducted from the employee’s taxable income, with earnings growing tax-deferred.
Like 403(b)s, the 2026 contribution limit for 457s is also $24,500 and $32,500 for those age 50 or older. However, unlike 403(b)s, employer contributions to a 457 are not “on top of” employee contributions. In other words, the employee and the employer share only one contribution limit and, as a result, employer matching contributions are less common in 457s.
Another unique feature of 457(b) plans is their special catch-up provision. Eligible participants who are within three calendar years of the plan’s Normal Retirement Age (typically age 65) may be able to contribute up to twice the standard annual limit, allowing them to “make up” for unused deferrals from prior years. However, participants cannot use the age 50+ catch-up and the special 457 catch-up in the same tax year.
Roth Diversification
One of the key advantages of building wealth outside of your pension plan is the ability to diversify your retirement savings between pre-tax (traditional) and post-tax (Roth) accounts, which can be accomplished through 403(b)s and 457s. It’s important to note that pensions are generally taxable, meaning withdrawals or annuitized payments are subject to ordinary income tax. Roth accounts, by contrast, are funded with after-tax contributions. Because taxes are paid upfront, qualified withdrawals are 100% tax-free.
Maintaining multiple “buckets” of retirement savings – both traditional and Roth – provides valuable flexibility in retirement. This flexibility becomes especially important when managing Required Minimum Distributions (RMDs). Beginning at age 73 (in 2026), the IRS requires retirees to start withdrawing funds from most pre-tax retirement accounts (the government wants the taxes they’re owed). As a result, RMDs can push retirees, particularly those with large pre-tax balances, into much higher tax brackets during their golden years. Roth accounts are not subject to RMDs, which helps avoid these downstream tax consequences. While there are valid arguments for both traditional and Roth strategies, the strongest financial plans benefit from holding meaningful balances in each.
Additional Savings Strategies
IRAs – Anyone with earned income can contribute to an IRA. While contribution limits are lower than most employer-sponsored retirement plans ($7,500 in 2026; $8,600 for those age 50 or older) and tax deductions may phase-out at higher income levels, IRAs remain an important component of a comprehensive financial plan.
Like 403(b)s and 457s, IRAs can be structured as either traditional or Roth. One of the most attractive characteristics of an IRA is the level of control it offers. The account owner determines how investments are managed and has access to a much broader range of investment options than most pensions, 403(b)s, and 457s.
Brokerage Accounts – One of the primary limitations of the retirement accounts we’ve discussed to this point is that, with a few exceptions, withdrawals before age 59 ½ are subject to early-withdrawal penalties. A brokerage account largely addresses this concern because they aren’t subject to such penalties. Though you should still be aware that earnings are taxable as either income or capital gains, a brokerage account just adds one more layer of flexibility during both your working years and in retirement.
As with IRAs, the account owner maintains full control over investment decisions and how they’re managed, making brokerage accounts a valuable complement to tax-advantaged retirement savings.
Receiving Your Pension Benefits
When it comes time to take your pension, you’ll need to choose how you want your benefit paid. Most plans offer several methods, each with its own tradeoffs:
Annuitization – This option provides guaranteed income for life. There are several annuization options, with the most common being Single-Life, Joint and Survivorship, and Period-Certain.
- Single-Life offers the highest monthly payout because it covers only your lifetime. Payments stop upon your death, and no benefits are paid to your spouse or heirs.
- Joint and Survivorship provides a lower monthly payout than Single-Life because it covers two people – you and your spouse. If you pass away first, your spouse will continue to receive a percentage of the original benefit (sometimes 50% or 75%).
- Period-Certain guarantees payments for a specified amount of time, typically 10-20 years. If you die before the period ends, your spouse or beneficiary will receive the remaining payments. If you outlive the period, payments continue for your lifetime.
Lump-Sum Direct Payout – This option involves taking the present value of the pension as a lump-sum payment. You’re free to use the funds as you wish, however the distribution is generally subject to ordinary income tax.
Lump-Sum Rollover to IRA – If you’ve built a well-rounded financial plan using the strategies laid out above, rolling your pension into an IRA is often worth strong consideration. When executed as a direct rollover, this option is tax-free and penalty-free. You’ll gain all the same benefits as a traditional IRA, including investment flexibility. Another key consideration relates to estate planning. When you rollover your pension into an IRA, the assets remain with you (and ultimately your heirs) after you and your spouse pass away. This typically isn’t the case with annuitized pensions, though it depends on the annuitization option you choose.
This content is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.