Retirement Vs. Pension
Planning for your own retirement is critical. Don't expect that Social Security benefits will cover your expenses much less afford you the retirement lifestyle you envision.
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Retirement Plans
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First, there are different types of retirement plans. One type is a defined contribution plan. These include employer-sponsored plans like 401k plans as well as IRAs. You contribute to these plans and generally make the investment options.
Benefits
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Your employer may contribute to these types of plans by matching a percentage of your contribution. This is effectively "free money," and if it's offered, you should take full advantage of it. Additionally, your contributions may be tax-deductible.
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Distributions
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Withdrawals from these plans can begin at age 59 ½ and are called distributions. For most defined contribution plans, you will claim the yearly distribution as income and pay taxes on it in the year you receive it. Roth IRAs are the exception to this.
Pension Plans
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The other type of plan is a defined benefit plan. In these, your employer pays you a fixed amount based on your salary, years of service and age. These plans are funded by the employer through some sort of dedicated investment fund.
Lump Sum
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Depending on your defined benefit plan, you may choose to take a lump sum payout at retirement. While it offers the benefit of putting all the money within your control, you will also pay a large sum in taxes as the full amount is considered income for a single year.
Monthly Pension
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The other option is to take monthly payments. In addition to some tax savings, you can count on a fixed amount each month when budgeting expenses. If your pension is invested in an annuity, you also have the benefit of monthly income for life.
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References
- Photo Credit Image by Flickr.com, courtesy of Doug Shick
