Most pensions do not run out during your lifetime, but some types can be depleted or reduced

Whether your pension runs out depends on what kind of pension you have and how it was structured. A defined benefit pension — the traditional kind where your employer promises you a fixed monthly payment for life — will not run out as long as the pension fund remains solvent. You receive the same amount every month until you die, regardless of how long you live. A defined contribution pension, where you and your employer contributed to an account that was invested, can run out if you withdraw from it faster than the remaining balance grows.

The risk of running out is real but manageable. It depends on three things: how much money is in your account, how much you withdraw each month, and how long you live. Someone who retires at 65 with a modest balance and takes large withdrawals may deplete their account by 80 or 85. Someone with a larger balance and smaller withdrawals may not. The math is straightforward, but the outcome is uncertain because nobody knows how long they will live.

Key Takeaways

  • Defined benefit pensions pay a fixed amount for life and do not run out, but defined contribution pensions can be depleted if withdrawals exceed the account balance plus investment growth.
  • The risk of running out depends on your starting balance, your monthly withdrawal amount, and your life expectancy — all three matter equally.
  • You can reduce the risk by taking smaller withdrawals early on, delaying when you start withdrawals, or converting part of your account to an annuity that pays a may provide amount for life.
  • If you have both a defined benefit pension and a defined contribution account, the pension covers your basic needs and the account becomes discretionary spending money.

How defined benefit pensions protect you from running out

A defined benefit pension is a promise from your employer or former employer to pay you a set amount each month for the rest of your life. The employer or the pension fund bears the investment risk and the longevity risk — meaning if you live longer than expected, they still pay you. If the fund runs out of money, there is a federal backstop called the Pension Benefit Guaranty Corporation (PBGC), which takes over and continues paying you, though sometimes at a reduced amount if the fund was severely underfunded.

This structure means you cannot outlive a defined benefit pension. The payment is may provide regardless of market performance or how long you live. The tradeoff is that you have no control over the amount — it was set when you retired, and in most cases it does not increase with inflation. If you took a lump sum payout instead of monthly payments, that lump sum can run out if you spend it too quickly, but the monthly pension itself cannot.

How defined contribution pensions can be depleted

A defined contribution pension — such as a 401(k), 403(b), or traditional IRA — is an account in your name with a balance. When you retire, that balance is yours to manage. You decide how much to withdraw each year. If your withdrawals exceed what the account earns in investment returns, the balance shrinks. Eventually, if you withdraw too much, the account reaches zero.

The standard rule of thumb is the 4% rule: withdraw 4% of your account balance in the first year of retirement, then adjust that dollar amount for inflation in subsequent years. This approach has historically allowed most people to avoid depleting their account over a 30-year retirement. However, this is not a may provide. If you retire during a market downturn, withdraw more than 4%, or live longer than 30 years, you face a real risk of running out of money.

Some people convert part or all of their defined contribution account into an annuity, which works like a defined benefit pension: you give a lump sum to an insurance company, and they pay you a fixed amount each month for life. This eliminates the risk of running out, but it also means you lose access to the remaining balance if you die early.

What to do if you are worried about depleting your account

If you have a defined contribution pension and are concerned about running out of money, you have several options. The first is to withdraw less. A 3% withdrawal rate is more conservative than 4% and reduces the risk significantly, though it means less spending money each year. The second is to delay retirement by a few years, which gives your account more time to grow and shortens the period you need to fund.

A third option is to work part-time in early retirement. Even modest income from part-time work can reduce how much you need to withdraw from your account, which extends how long it lasts. A fourth option is to buy an annuity with part of your balance — for example, use half your account to purchase an annuity that covers your essential expenses, and withdraw from the remaining half for discretionary spending. This hybrid approach gives you a may provide income floor and flexibility above it.

If you have both a defined benefit pension and a defined contribution account, your pension likely covers your basic living expenses. In that case, your defined contribution account is supplemental — you can afford to be more conservative with it or even leave it untouched and pass it to your heirs.

How life expectancy affects whether your pension runs out

The longer you live, the more total money you will need. Someone who lives to 85 needs their pension to last 20 years. Someone who lives to 95 needs it to last 30 years. This is why life expectancy is built into pension calculations. Defined benefit pensions are priced assuming people will live to an average age — currently around 78 to 82 depending on gender and health — and the employer funds the pension accordingly.

For defined contribution accounts, you cannot know your life expectancy in advance. This is why the 4% rule and other withdrawal strategies use conservative assumptions — they assume you might live into your 90s. If you have family history of longevity, or if you are in good health, you should withdraw even less. If you have serious health conditions, you might be able to withdraw more, though this is a difficult calculation to make on your own.

What happens to your pension if the fund goes bankrupt

If you have a defined benefit pension and the company or fund goes bankrupt, your pension is protected up to a limit. The Pension Benefit Guaranty Corporation is a federal agency that insures defined benefit pensions. If your pension fund cannot pay, the PBGC takes over and pays you directly. The maximum it pays is set by law and changes each year — in 2024 it was around $5,500 per month for someone who retired at 65, though the exact amount depends on your age and the type of pension.

If your pension was paying more than the PBGC maximum, you will receive less after the takeover. This is rare for average workers but can happen if you had a high salary or a generous pension formula. If you are concerned about your specific pension fund's health, you can check the PBGC website or contact your pension administrator to ask about the fund's status.

Frequently Asked Questions

Can I run out of money if I have a pension from my job?

If your pension is a defined benefit — a fixed monthly payment for life — no, it will not run out. You receive the same amount every month until you die. If you took a lump sum payout instead, that lump sum can run out if you spend it too quickly. If your pension is a defined contribution account (like a 401(k)), yes, it can run out if you withdraw too much each year.

What is the safest way to withdraw from a retirement account?

The 4% rule is a common starting point: withdraw 4% of your balance in year one, then adjust that dollar amount for inflation each year. This has historically worked for 30-year retirements. A 3% withdrawal rate is more conservative. Buying an annuity with part of your balance guarantees income for life but reduces flexibility.

What happens if I live longer than my money lasts?

If you have a defined benefit pension, it continues paying you for life. If you have only a defined contribution account and it runs out, you will need to rely on Social Security, family support, or other income sources. This is why conservative withdrawal rates and annuities are important — they reduce the risk of this scenario.

Does inflation affect whether my pension runs out?

Yes. If your defined benefit pension does not increase with inflation, its purchasing power shrinks over time. A $2,000 monthly pension in 2024 might feel like $1,500 in 2034 if inflation averages 3% per year. For defined contribution accounts, inflation reduces how far your withdrawals go, which is why the 4% rule assumes you will adjust your withdrawals upward each year.

Can I convert my retirement account to a pension that will not run out?

Yes, by buying an annuity. You give an insurance company a lump sum from your retirement account, and they pay you a fixed amount each month for life. This eliminates the risk of running out but also means you lose access to that money if you die early. Some people buy a partial annuity to cover essential expenses and keep the rest flexible.