Longevity and Fixed Pensions

by Matt Sivertsen, CFP®

Reflecting back on the year 2004, I was one year into working at The Planning Center. I had just started working on my Certified Financial Planner® (CFP) designation.  This was also the year I lost my great-grandma Polly at the age of 97.

Ironically, not too many years ago, I realized my Uncle Rich, (from my mother’s family) had a 1947 red Farmall tractor in his barn that my great-grandfather bought for his farm in Kankakee, IL.  The tractor I am sitting on came out of the Rock Island, IL factory in which both my great-grandparents (from my father’s family) worked.

Here I was, going into a profession that had only been around a few decades. It was a profession created because people were living so much longer after retirement. People needed to financially plan for when their paycheck stops, because they could potentially live in retirement for as many years as they had worked.

My great-grandma Polly was born in 1907. She worked the latter part of her career at the Farmall Tractor Factory in Rock Island, Illinois. Polly starting working for the company in the mid-1940s, and she received a pension check from Farmall—for life—upon retirement. That’s what most good companies did for their employees back then.

My great-grandpa also worked for Farmall and he, too, got a pension check. So when my great-grandma retired at age 65 in 1972, the couple had two Farmall pension checks and two Social Security checks to live on. This went on for 12 years until we lost my great-grandpa in 1984. From 1984 on, my great-grandma had her Farmall pension and one Social Security check on which to support herself.

As I reflected with my family members on losing our great-grandma Polly, we thought about the roughly $1,250 a month Farmall pension she received. That ended up being about $15,000 a year or $480,000 over the 32 years she collected it. Working on my CFP designation made me think about how great a pension really is.

A pension is like receiving some kind of paycheck for life in retirement. My great-grandma’s pension was a fixed one. It paid her the same monthly amount in 1972 as it paid her in 2004 when she passed away.

A fixed pension is a still great thing. However, there was also the realization that her pension was great only until inflation wiggled its way into the picture. I took out my financial calculator to look up average household incomes and inflation; I wanted to see how much better that check was for my great-grandma Polly in 1972 as compared to 2004.

In 1972, the approximate average household income (adjusted for inflation) was $10,000 a year.  WOW, I thought, just that one pension of $15,000 a year was 150% of the average household income at the time. This was not even counting Social Security or my great grandfather’s pension and Social Security checks. In 2004, the average household income was approximately $38,000 at that point, so that same $15,000 a year pension was now only 40% of the average household income.

I found it fascinating that a great benefit like this, without a cost of living or inflation factor, could shrink that much for someone who lives a long time! This inflation effect means people have to scale down their expenses as they age. They should be prepared to spend less or have investment assets and other income or resources to make up the difference that inflation eats away.

Granted, today we don’t see many employers offering pensions. If you are among the fortunate, your pension may have inflation or cost of living factors built into it. For those that have fixed pensions, I always tell them that while it is a great benefit, it will buy far more things when you’re age 65 than when you’re age 95.

Then I tell them the story of my great-grandma Polly.  I thank my great-grandma for many things, and see her longevity as a gift. So was the fixed pension story that I learned one year into my financial planning career!

 Disclosure: You should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from The Planning Center, Inc. and to the extent that you have any questions regarding the applicability of the issues discussed above to your individual situation, you are encouraged to consult with the professional advisor of your choosing. The Planning Center, Inc. is neither a law firm nor a certified public accounting firm and no portion of this article should be construed as legal or accounting advice.


Matt Sivertsen, CFP®  is a Partner/Sr. Financial Planner in the  Quad Cities office of The Planning Center, a fee-only financial planning and wealth management firm.

Email him at: matt@theplanningcenter.com.