How a Pension Changes Your FI Number

Guaranteed lifetime income changes a FIRE plan more than almost anything else on the balance sheet. A teacher's pension, a military retirement, an annuity, Social Security — each dramatically reduces what your portfolio has to do.

But there are two ways to put that into a model, and they give different answers. Choosing carelessly produces a plan that is either quietly over-optimistic or unnecessarily gloomy.

Two treatments

Treatment 1: capitalise it as an asset

Convert the income stream into the portfolio value that would produce it, and add that to your assets:

implied_value = annual_pension / withdrawal_rate

A $24,000 pension at a 4% rate becomes $600,000 of notional assets.

Treatment 2: subtract it from spending

Reduce the spending your portfolio must fund, then size the target against what remains:

net_spend = total_spending − pension_income
target = net_spend / withdrawal_rate

$112,000 of spending less a $24,000 pension is $88,000, requiring $2,200,000 instead of $2,800,000.

Both arrive at the same $600,000 difference, which makes them look interchangeable. They are not, and the reason is timing.

Why subtraction is the better default

It handles the start age honestly. Capitalising a pension implies you hold that value today. You do not. If the pension starts at 60 and you retire at 50, there are ten years where it contributes exactly nothing, and the capitalised version quietly papers over all ten.

It cannot be spent. $600,000 of notional pension value cannot cover a new roof, fund a Roth conversion, or be sold in a downturn. Listing it beside genuinely liquid assets invites you to plan as though it could.

It stays honest about the withdrawal rate. The capitalised figure is an artefact of the rate you picked. Change from 4% to 3.5% and the same pension "becomes" $685,000 — even though nothing about the pension changed. Subtracting from spending keeps the pension as the fixed thing it is and lets the rate act only on the portfolio.

It matches how you experience it. A pension does not arrive as a lump sum. It shows up monthly and pays part of the bills. Reducing net spending is a description of what actually happens.

The Couples FI Planner uses subtraction for exactly these reasons, and applies it per partner from each pension's own start age.

The timing problem, concretely

Consider a household spending $112,000 a year with a $24,000 pension beginning when one partner turns 60.

Period	Net spend	Target at 4%
Before pension	$112,000	$2,800,000
After pension	$88,000	$2,200,000

The target is a step function, not a flat line. And which side of the step you are standing on depends entirely on the ages involved.

In one realistic scenario — partners aged 36 and 37, a $920,000 starting portfolio, $57,000 of combined annual savings, and a 5% real return — the portfolio reaches the $2,800,000 target in 2040, at ages 50 and 51. The pension starts in 2050.

So the $600,000 reduction arrives ten years after the household is already funded. In this plan, the pension is not what gets them to FI; it is what makes their sixties comfortable.

Now shift the pension start age to 50 and the arithmetic transforms. The target drops to $2,200,000 during the accumulation years, and the crossing arrives materially sooner. Same pension, same dollars, completely different plan — because the start age is where the leverage actually lives.

This is the single most common modelling error with pensions: treating an age-60 income stream as though it were available at 50.

The questions to ask about your pension

Is it inflation-adjusted? This is the big one. A COLA'd pension holds its purchasing power; a fixed one loses roughly a third of it over 25 years at 2.5% inflation. If your pension is not indexed, subtracting a constant amount in a real-dollar model overstates it in the later years. A rough correction is to subtract a haircut version of it, or to plan for spending to rise against a fixed payment.

What is the survivor benefit? Many pensions drop to 50% or stop entirely on the recipient's death. For a couple, that is a real risk to model — the surviving partner faces a higher net spend precisely when the household is oldest.

How solid is the payer? A federal or state pension is not the same promise as a single private employer's. Corporate plans can be frozen or transferred to an insurer. This is a judgment call, not a calculation, but it belongs in the decision.

What does claiming early cost? Most plans reduce the benefit for early claiming. Taking it at 55 instead of 62 might mean a permanently lower payment — which trades a smaller target now for a larger one later. Worth modelling both.

Does it interact with Social Security? Some public-sector pensions have historically affected Social Security benefits through provisions that have themselves changed recently. If you have a non-covered pension, confirm the current rules rather than relying on older guidance.

Social Security is a pension for modelling purposes

Everything above applies to Social Security, with the timing problem at its most severe.

If you retire at 50 and claim at 67, that is seventeen years your portfolio funds unassisted. Capitalising your benefit and adding it to today's assets makes those seventeen years disappear from the model — which is the exact opposite of prudent, since they are the years that determine whether the plan survives.

Treat it as a pension with a start age. Enter the benefit you expect at the age you plan to claim. The projection then shows the two distinct phases honestly: a long stretch where the portfolio does everything, followed by a lower target once the income begins.

Whether to include it at all is a separate judgment about long-term policy risk. Some planners include the full estimate, some haircut it, some exclude it and treat it as upside. Any of those is defensible. Pretending it starts today is not.

What to do with this

1. Subtract, do not capitalise.
2. Enter the real start age, not the year you retire.
3. Check whether the plan works in the years before the income begins — that window is the actual test.
4. If it is not inflation-adjusted, discount it, or plan for the gap to widen.
5. Model the survivor case if a partner depends on it.

The Couples FI Planner handles a pension per partner with its own start age, and shows the target stepping down in the year it begins. For the single-balance-sheet version, the Can I FIRE Yet? Calculator treats other passive income the same way — reducing portfolio-funded spending rather than inflating assets.

More on the household mechanics in couples FIRE when one partner retires first, and on the years before any of this income starts, what counts toward Marketplace MAGI.

This is an explanation of planning arithmetic, not personalised financial advice. Pension terms vary enormously — read your own plan documents.