Everything about retirement changes if you’re one of the lucky few who have a pension in America — here’s why

If you’re one of the few American workers with a traditional retirement, your retirement strategy will likely look different than those of your peers.

As of March 2025, only 14% of U.S. workers were covered by a defined benefit pension plan, according to the Bureau of Labor Statistics. (1) These plans are much more common among government employees and retirees.

In fact, according to Congress, about 86% of state and local public sector workers have access to such a pension. (2) And in 2024, 56% of retirees report receiving retirement income, according to the Federal Reserve. (3)

Depending on your age and employer, a defined benefit pension can significantly shape your retirement outlook. Guaranteed monthly income offers stability but brings unique considerations for tax strategy and estate planning.

Here’s how you can adapt your retirement playbook.

Unlike withdrawals from a 401(k) or IRA, retirement income is generally fixed and cannot be changed. According to the IRS, every annuity payment is considered ordinary taxable income; this potentially increases your tax liability and affects how much of your Social Security benefits are taxed.

Because your retirement income is included in your modified adjusted gross income (MAGI), it may also push you above Medicare’s income-related monthly adjustment amount (IRMAA) surcharges threshold, resulting in higher premiums.

State taxes may also apply depending on where you live. Only 15 states fully exempt retirement income from state taxes, according to AARP. (4) Review your state’s tax code to see if any exemptions or deductions could reduce your tax burden.

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Most employer-sponsored retirement plans offer a choice between a one-time lump sum or lifetime monthly payments (annuity). Deciding between the two can be complicated.

An annuity option provides a guaranteed monthly income and offers long-term financial stability. Most private sector pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), which protects payments up to certain limits in the event of employer insolvency.

In many cases, you can also elect survivor benefits to continue making payments to your spouse or beneficiary after your death.

A lump sum, on the other hand, gives you full control of your money and allows you to invest; potentially allowing you to earn higher returns. It also makes it easier to inherit unused funds. However, this comes with the risk of market volatility and the possibility of extending the life of your savings.

Traditional pensions are becoming increasingly rare, but if you’re part of a defined benefit plan, you have the valuable benefit of guaranteed retirement income.

But this steady income can complicate other important decisions, like when to file for Social Security, where to live, how to manage your tax liability, and what to leave to your heirs.

Working with a financial professional can help you weigh these factors, balance competing priorities, and make the most of your retirement.

We rely only on vetted sources and reliable third-party reports. For details, see editorial ethics and guidelines.

Bureau of Labor Statistics (1); Congress.gov (2); Federal Reserve (3); AARP (4).

This article provides information only and should not be construed as advice. It is provided without any warranty.