Old-fashioned pensions might be disappearing, but they haven't vanished. According to a report published in 2010 by the U.S. Bureau of Labor Statistics, 20% of private industry workers and 79% of state and local government workers were participating in a defined-benefit (DB) retirement plan.

Connie Stone, who heads Stepping Stone Financial in Chagrin Falls, Ohio, advises these clients, who are widows, corporate executives, professionals and educators expecting to receive or are currently receiving payments from DB pensions. Some of the financial planners interviewed for this article indicated that approximately 10% of their clients now receive pensions or may receive them in the future.

The financial turmoil of the past few years may have enhanced the appeal of a dependable, lifelong income stream. "For a long time, I was not sure that clients (or even some planners) really understood how valuable a DB pension can be in planning for retirement," says Rob Studin, executive director of financial advisory services at First Financial Group of the South in Huntsville, Ala. "But now, with our present interest rate environment and market volatility, we have come to realize how valuable these benefits truly are for covered employees."

Randy Breidbart, founder of Park Avenue Financial Advisors in New York, voices similar sentiments. "With people losing jobs, the value of guaranteed income goes up," he says. "In many cases, both the husband and the wife qualify for pensions. Such clients might not have as much income as other clients, while working, but they may be better off than many other retired couples."

Retirees with benefits may indeed be better off-if their pensions and related health plans survive. Some states are already pulling back on promises to public employees, while some companies have pared down their pensions. In response, planners may have to rethink and in some cases revise strategies for clients covered by DB plans.

MORE GROWTH?

Clients who are counting on pensions may be more suitable for growth-oriented investing than normally would be the case. Ben Tobias, president of Tobias Financial Advisors in Plantation, Fla., says pensions affect his clients' portfolios in two ways.

First, he slightly reduces the amount set aside as an emergency fund. Second, he looks at the present value of the pension as a component of the client's net worth and portfolio. Therefore, the balance of the portfolio can be invested a bit more aggressively.

For example, in today's low-yield environment, receiving $35,000 a year from a pension might provide the cash flow of $1 million invested in bond funds. Such a client could tilt more toward equities.

Tobias cautions, however, that you need to be careful if you invest more aggressively. "Keep the client's risk level in mind. When the portfolio declines due to market conditions, it is the rare client who will factor in the stability of his or her pension," he adds.

Rich Moran, senior financial advisor at Moran, Kimura & Heising, a financial planning firm in Torrance, Calif., concurs that it's vital to consider the risk tolerance of clients with pensions. He could logically be more aggressive with the rest of their portfolios than with other clients, but says that his clients with large DB pensions are "uniformly very risk-averse. So their investment portfolios are typically structured for very moderate growth at less than market risk."

BUILDING ON THE BASICS

Moran takes pensions into account when doing cash flow modeling for clients' retirement. He applies the guaranteed cash flow first to basic living expenses, he says. Often, that offsets a large part, if not all, of the basics. The negative is that the capital providing that cash flow is not available for inheritance. If that's important-and Moran says it usually isn't-the client would need to dedicate other assets to that objective.

Studin also believes that pension income can cover a retiree's basic needs, which include food, clothing, housing, insurance (particularly medical and long-term care insurance) and transportation. "In order for clients to have a secure retirement, stable income sources should cover their basic needs for a lifetime," he says, adding that those sources should not be subject to market volatility, interest rate risk, longevity risk, inflation risk or any other major risk to retirement income.

Those stable sources of income might include Social Security, DB pensions and guaranteed annuities (either fixed or variable). Once Studin feels these expenses are secure, he uses traditional asset allocation and draw-down planning to meet discretionary expenses, specific goals (weddings, grandchildren's education) and legacy planning.

Using DB pension income (along with Social Security and annuity income) to secure basic needs allows his firm to be more aggressive when funding other expenses, if the client has the risk tolerance, he says. "If basic needs are secure, you can always postpone the extra-long vacation that would deplete too much of the portfolio in a down year."