When you think of retirement benefits, you probably think of the income stream that you're entitled to once you reach a certain age. That's probably because the primary function of retirement benefits is to maintain your income even once your career is over. Not all retirement benefits, however, are the same. They vary according to the structure of of the plan. Whether your retirement savings are invested in a traditional pension plan or a trendy 401(k) fund, you could be looking forward to an income stream for the rest of your life once you retire.
Defined benefit pension plans are falling by the wayside. Employers began replacing traditional pensions with defined contribution retirement plans, such as common 401(k), plans starting in the 1980s. The reason for the shift comes down to cost. It is more expensive for employers to fund a pension because they are responsible for the entire amount. While an employer might match your cash deposits in a 401(k) plan up to a certain percentage, you're ultimately responsible for making sure the fund is large enough.
If you're invested in a pension, you're one of the fortunate ones. That's because pension plan sponsors take full responsibility for your retirement benefit. This means that even though you won't get a vote in the way that your retirement savings are invested, you'll probably know the size of your retirement benefits years before you finish your career. Pension plan sponsors agree to pay you a set-income amount each month upon retirement.
The amount of retirement benefits you receive from a 401(k) plan is largely up to you. You must decide the percentage of your income that you want directed into the plan. Your employer might or might not provide a matching contribution. You even get to choose your mutual funds -- professionally managed investment funds -- from among those offered by the plan. The amount of money you invest and the investment performance of your selections determine your retirement income.
If you're invested in an employer-sponsored retirement plan, you may be promised health benefits when your retirement begins. Don't get too excited, because an employer has the right to change its mind by the time you actually reach retirement age -- especially if you work in the private sector. Public sector jobs, such as those provided by government agencies, are more likely to offer health benefits after retirement. Familiarize yourself with your retirement plan's summary plan description (SPD), in which you're likely to find details such as the conditions under which your health benefits will continue.
- CNN Money: Ultimate Guide to Retirement
- United States Department of Labor: DOL > EBSA > Publications > In Brief - Can the Retiree Health Benefits Provided By Your Employer Be Cut? In Brief - Can the Retiree Health Benefits Provided by Your Employer Be Cut?
- United States Department of Labor: Types of Retirement Plans
- U.S. Department of Labor: Beyond the Numbers -- Pay and Benefits
- Hemera Technologies/AbleStock.com/Getty Images
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- What Happens to Employee Retirement Plans When a Company Goes Bankrupt?
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- Advantages & Disadvantages of Pensions
- The Advantages & Disadvantages of the 401(k)
- What Does It Mean When a Pension Plan Is Underfunded?