Pensions are less common today than they were a generation ago. But they still offer retirement security and peace of mind. They’ve defined benefit plans with retirement payouts based on a formula that typically considers salary, age, and tenure with the company. Pension plans offer guaranteed retirement income based on a formula encompassing an employee’s salary, age, and tenure with the company. Employers primarily fund them, and depending on the plan, they may also be inherited by surviving spouses or children. Unlike 401(k)-style retirement savings accounts, professional managers pool and invest pension funds. This can help reduce investment risk.
Guaranteed Income in Retirement
After a year that saw significant market volatility and questions about the health of Social Security, many people are worried about how far their retirement savings will go. Fortunately, strategies that include guaranteed income sources can help reduce these concerns. For example, pensions offer a fixed payment for life based on an employee’s years of service and earnings. These payments are also protected, within certain limits, by federal insurance from the Pension Benefit Guaranty Corporation. However, most retirees need a Boeing pension or similar guaranteed lifetime income. As a result, running out of money in retirement remains one of the top concerns among Americans. Survey respondents without any guaranteed income stream say that having more would ease their fears about market volatility and the impact of inflation.
In contrast to the 401(k) and similar tax-deferred retirement savings plans offered in the private sector, pensions are typically taxed at the source. Many pension systems also offer an opportunity to defer some of the employee’s contributions, reducing their cost. Regardless of their design, most pension systems require employees to work for a minimum period (known as the “vesting period”) before they are eligible for a benefit. Workers who leave public-sector employment before becoming vested can usually only receive a refund of their contributions.
Inheritance provisions are a complex issue that involves more than just money. They also involve heirs and their relationships with each other, which can often result in conflict and distance within the family. The legal determinants of inheritance distribution provide the framework, but informal family strategies influence how material inheritance is distributed. The altruistic motivation focuses on preserving the inherited estate, which is perceived as a symbol of family identity. Heirs also value the maintenance of family relations and equity in the division.
Most pension schemes rely on long-term investments to make their promised payments. That means the money in your pension pot can withstand short-term stock market falls and outpaces inflation. The investment decisions are made by the fund managers, who usually invest in a range of assets, including company shares, property, and bonds. They will typically move the balance of your pension pot from riskier investments (such as company shares) to less-risky ones as you get closer to retirement. Many state and local pension systems require employees to work a minimum amount of time, known as the vesting period before they can receive their benefits. These are sometimes split into categories called benefit tiers.
A pension plan is a retirement vehicle that allows employees to earn defined benefits at retirement. Defined benefit plans, which employers typically fund, guarantee retirement payouts based on a formula that considers an employee’s salary, age, and years of service with the company. Unlike 401(k)-style retirement savings plans, these benefits are not based on the performance of underlying investments. They are insured (up to certain limits) by the federal government through the Pension Benefit Guaranty Corporation. Pensions also provide tax incentives that encourage individuals to save for retirement. The key to a successful pension plan is ensuring you understand your specific plan’s details and what to expect when you retire. Read the summary plan description and address any questions or concerns with your administrator. In addition, periodically review your account information to ensure it is accurate and up-to-date.