Knowing which type of retirement plan will fit your needs will help ensure that you have enough money to retire comfortably. The sooner you know which plan you want, the better equipped you will be when the time comes to retire. If you start saving early, you will be able to have a large amount of money saved up, and you will have a worry free retirement. The first step in choosing a retirement plan is to understand what they all are. If you are looking at pension funds, you will come across the terms defined-benefit, and defined-contribution. Each version of a pension plan is unique in its own way, and they provide different advantages and disadvantages.
A defined-benefit plan is a plan that is employer-sponsored. In this type of plan, the employer will guarantee that the employee will receive a specific amount of money upon their retirement. The amount of money you receive is figured out based on a formula that uses two different factors. Those factors are salary history and the duration of employment. All of the risk of investing and providing the employee with their retirement money is all under the control of the company. You will get your guaranteed funds no matter what the performance was of the investments that the employer has made.
A defined-contribution plan is a plan where the employer makes predefined contributions to the employee. The employee can make contributions to the account, and the employer can match the funds up to a certain amount. However, the one big difference between the two types of plans is that with the defined-contribution plan, the final amount that is received upon retirement is completely dependent on how the investments did. There is no knowing exactly how much money you will be getting when you retire because it relies on how the market has done, as well as how much has been contributed to the account.
In today’s working world, you will see many more defined-contribution plans than defined-benefit plans. This is because a defined-benefit plans pose much more of a risk than its counterpart. Employers who have a defined-benefit plan have to ensure that their employees get the predetermined amount of money, no matter what happens to the underlying assets. There are also long-term obligations that come with the defined-benefit plan for the employer since more people who have this type of plan stay with the same company for the life of their career.
However, defined-contribution plans have their negative aspects, as well. You could invest your money into a certain stock or bond, and it could drop very quickly without warning. Then, all the money you have saved up will be gone, and you will have to work very hard to earn that money back. With a defined-benefit plan, you will never have to worry about any of your funds disappearing because of a bad investment, you will know exactly how much money you will have when you retire.
Each type of pension plan can benefit a person in different ways. When people choose a plan, they usually choose based on their preference of one factor in a plan versus the other. Choosing between a defined-benefit plan and a defined-contribution plan will come down to how much control you want over your investments and how much security you want in your retirement. Check with your employer and see which plans they offer and choose what plan is right for you.