How to Invest in a Pension

A thoughtfully invested pernsion can provide income throughout your retirement years.

Pensions have taken center stage as economic challenges have begun to impact the savings of the Baby Boomer generation, now retiring in large numbers. Self-employed people can fund their own pensions, while others can join an employee's plan if it is offered as a job benefit. Assets should be distributed among cash, bonds, and stocks for maximum security and return.

Things You'll Need

• Tax return
• Calculations of income and expenses
• Retirement calculator

Instructions

1. Determine the amount of money that you will need for your retirement years. This can be simplified using a retirement calculator that you can access through the Employee Benefit Research Institute's Education and Research Fund. With it, you can estimate your monthly expenses, taking into account inflation and cost of living increases.

2. Talk to your benefits administrator to verify the type of pension being offered by your employer. There are two primary types of employer-sponsored pensions. The first is a guaranteed or defined benefit plan. This type guarantees the employee's retirement income in a predetermined amount. The second type is a defined contribution plan, whereby you make contributions in to the plan until you retire and your employer may or may not make additional contributions.

3. Calculate the amount of money you currently have available to invest. Make a list of your current income and which part of it is guaranteed income. Make a list of your current routine expenses. Determine how much money you can contribute to your pension. Arrange for that amount to be deducted from your paycheck as a pension contribution. Sign all appropriate paperwork given to you by the benefits administrator where you work.

4. Make regular and consistent contributions to your pension. Divide up your pension holdings by practicing asset allocation and diversification. Use diversification to make sure that your pension funds are distributed among cash, bonds, and stocks. Do not allow pension funds to reside in only one type of investment.

Tips & Warnings

• Do not neglect to read pension statements and the "fine print" of the plan's details whenever you receive them.

References

• United States Department of Labor: What You Should Know About Your Retirement Plan
• Internal Revenue Service

Resources

• Choose To Save