Pension Plans as Strategic Retirement Assets in a 401(k)-Dominant World

For a 55-year-old bus driver earning $65,000 annually, retirement planning isn't just about saving—it's about navigating a precarious landscape where the reliability of a traditional pension clashes with the volatility of a 401(k). With nearly 60% of U.S. workers now relying on defined contribution plans (401(k)s, IRAs), the shift from pensions has eroded the safety net of guaranteed income. Yet, for millions like our bus driver, a public pension remains their largest retirement asset. The question is: How do near-retirees maximize this asset while mitigating risks in a world where pensions face solvency challenges and 401(k)s are hostage to market swings?

The Pension Paradox: Security vs. Flexibility

Public pensions offer two critical advantages: lifetime income and healthcare coverage. For our bus driver, a pension might provide $3,000/month post-retirement plus medical benefits, shielding them from longevity risk and healthcare costs. But this comes with trade-offs. Pension solvency is fragile— show the average ratio at 81% as of 2025, with some states like Illinois hovering at 45%. A plan's funded status determines whether benefits are at risk, especially if the employer (e.g., a city or school district) can't meet contribution obligations.

Meanwhile, 401(k)s offer flexibility but no guarantees. The bus driver's $200,000 401(k) balance could grow—or vanish—in a market downturn. The trade-off is stark: pensions are stable but tied to employer health, while 401(k)s are portable but vulnerable to market cycles.

The Near-Retiree's Dilemma

Our bus driver faces a choice:
1. Stay employed to preserve pension accruals and healthcare but risk job cuts or city budget shortfalls.
2. Switch careers for higher pay but forfeit pension benefits and lose healthcare until Medicare kicks in at 65.

The optimal path requires dual strategies:
- Stress-test the pension plan's viability. Use tools like the Milliman 100 Public Pension Funding Index to assess funded ratios. Plans above 85% are safer; below 70% warrant caution.
- Maximize 401(k) contributions. Even part-time work can boost savings. For 2025, the $22,500 limit (plus $7,500 catch-up) could add $30,000/year if possible.
- Diversify outside pensions and 401(k)s. Consider Treasury Inflation-Protected Securities (TIPS) or annuities to hedge against longevity risk.

Actionable Steps to Balance Risk and Reward

1. Evaluate Pension Health

Use state-level data:
- Check the plan's funded ratio (above 80% is healthier).
- Review assumed rates of return—plans with overly optimistic targets (e.g., 7%+) may underfund liabilities.
- Assess employer contributions: Are they meeting actuarial requirements?

2. Leverage Annuity Pricing Opportunities

Current annuity rates are attractive. A comparison shows duration-7 annuities at 4.92%, near 10-year Treasury yields. For the bus driver, converting part of their 401(k) into an annuity could lock in lifetime income while retaining liquidity in the rest.

3. Stress-Test the Portfolio

Run scenarios:
- Optimistic: 8% annual returns for 10 years.
- Pessimistic: 2008-style crash (-30%) followed by 5% recovery.

This reveals whether pensions alone are sufficient or if supplemental savings are needed.

The Bottom Line: Build a Hybrid Retirement

Near-retirees shouldn't choose between pensions and 401(k)s—they must use both strategically. The pension provides the “base” income, while 401(k)s and other assets act as the “buffer” against inflation and market shocks.

Investment Advice:
- For pension holders:
- Stay with employers only if the pension is well-funded (>85%) and healthcare is guaranteed.
- Diversify 401(k)s into low-cost index funds and fixed income (e.g., Vanguard Short-Term Bond ETF).

• For 401(k)-reliant workers:
• Maximize contributions and consider target-date funds for simplicity.

• Allocate 10–15% to gold or commodities (e.g., SPDR Gold Shares) to hedge against inflation risks highlighted in U.S. Money Reserve's report.

• For all near-retirees:

• Monitor pension plan solvency quarterly using state reports.
• Use annuities selectively—convert 20–30% of taxable accounts to immediate annuities now, while rates are favorable.

The retirement landscape is a tightrope walk between security and flexibility. By treating pensions as core assets and supplementing them with diversified savings, near-retirees can navigate it without sacrificing their golden years.

Data sources: Milliman 100 Public Pension Funding Index, Reason Foundation, NIRS, and U.S. Treasury yield data.