A while ago, retirement was pretty simple. You invested most of your career in a company, and they gave you a pension plan in return - and if you were lucky, a gold watch. The company would put money into the fund, and come retirement you’d be off to the races. Or at least you knew that a certain amount of money would be coming in each month during retirement. These days, things are a little more complicated.
There are two main types of pension plans still offered by many companies: defined benefit plans and defined contribution plans. Here’s a little background on both types:
Defined benefit plans
If you’re part of a defined benefit pension plan, your pension benefit is “defined” by a formula that determines how much money you will receive each year in retirement. There are a number of different formulas, but they’re usually based on your most recent or highest annual earnings and how many years you’ve been a member of your employer's plan. In addition to the annual pension you’ll receive from the plan, you may be eligible for additional benefits, also known as ancillary benefits. To learn more about your plan and its specific benefits check your annual statement or ask your plan administrator.
Defined contribution plans
With a defined contribution pension plan, your retirement benefits are based on contributions from you and your employer; and the investment income, if any, based on those contributions. When you retire you will have several different distribution options. For instance, you may have the option to take a stream of periodic payments, including Required Minimum Distributions, from the Plan; you could elect to transfer your account balance to an IRA; or you could elect take a lump sum distribution from the Plan and keep that money in your savings account or use it to purchase another product, such as an annuity, bank CD, or mutual funds to name just a few. Here are some of the things that might influence your account balance:
- Account contributions - Pension contributions will vary with each pension plan and each employee. The more money that is contributed, the more you’ll likely have when you retire.
- Years of growth - The more time your money has to potentially grow and earn investment income, the more you’ll likely have when you retire.
- Your earnings on the invested contributions - This will differ for each plan and individual plan member. Some pension plans will invest money for you, but most require you to make your own investment decisions from the options available within your plan. Either way, the value of your investments will depend on how well they perform.
Know your options
Find out what plans are available to you by speaking to your benefits administrator. And to learn more about the part your pension plan could play in a larger retirement portfolio, speak to a Voya Financial Advisors retirement consultant.
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. We recommend that you consult an independent legal or financial advisor for specific advice about your individual situation.
The information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
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