Types of Retirement Plans

Social Security is the foundation of your retirement plan. This benefit will be there as long as you live (you can’t outlive Social Security, we hope) and it doesn’t lose its value. There are several types of retirement plans other than Social Security. They are the defined benefit plan, defined contribution, cash balance and 401(k’s) to name a few. 

 

Social Security: The amount of money from Social Security a retiree receives is based on the number of years working, income and the age you start receiving benefits. Benefits begin at age 62 but waiting until 65 will ensure greater monthly benefits. Survivors can collect monthly checks upon your death. Statements of Social Security benefits are mailed out to most people every year within 3 months of their birthday. 

Defined Benefit: If your job offers a pension plan and you are a member, then you have a defined benefit pension plan. One advantage to a pension plan is the guarantee from your employer that a specified amount of money will be received upon retirement. There are several variables that play a role in the amount of money you receive including length of employment, earning power and employer contribution. The federal government guarantees this pension even if the company goes out of business. Most of the defined benefit plans send out monthly checks as long as you live. Your spouse can receive benefits after your death if so named. Some plans work hand-in-hand with Social Security. The law allows the employer to contribute to Social Security in your name and reduce the pension benefit up to 50 percent of your projected Social Security benefit. One benefit to this plan is the availability to some of the money if you retire before you incur your Social Security benefits. 

 

Before legally drawing from the defined benefit plan, you must participate for a certain amount of years. 

If you switch companies and jobs often, you risk not being vested anywhere and then there will be no money available at the time of retirement. You don’t want to be caught at retirement age with no pension plan.

Defined Contribution: The defined contribution plan is a new kind of pension. The employer and employee contribute and invest money. This type of plan comes with certain risks. Good investments and the amount of contributions will ensure a healthy retirement. On the other hand, poor investments and inadequate contributions may run the retiree short on money upon retirement. This plan specifies the amount of contributions to be made the employer toward retirement accounts.

Cash Balance Plans: The cash balance plan allows the retiree to receive a certain account balance upon retirement. You can take the money in monthly payment or a lump sum. This plan enables the employee upon retirement to take a lump sum of money as opposed to monthly checks. The participant’s account is credited each year with compensation from the employer and an interest payment. The interest payment is based on a fixed or variable interest rate.

401(k) Plans: This plan is funded through payroll deductions. A portion of your salary is invested and then tax deferred. One advantage to the 4019(k) is its flexibility. You can invest money as you want. Sometimes, your employer will match funds with a cap placed on the amount the company will match.