Retirement Plans - Defined Contribution / Defined Benefit

Guide

The typical employee will go to work every year for at least 30 years. While working, the individual shall earn wages or a salary as an exchange for their labor. However, a time does come when they will be seen as too old to work and shall have to retire. When this time comes, one may indeed live for another 20 years without their daily wages or monthly income. For this reason, it is essential to consider the available retirement plans.

Retirement plans assist individuals in preparing for retirement by doing the following: –

  • Implementing savings programs
  • Tapping into multiple sources of income
  • Planning for expenses
  • Asset management
  • Risk mitigation

With a good retirement plan, it becomes clear how long an individual would have to put some of their earnings aside to meet the future cash flow goals. The earlier a person starts with their retirement planning the better, as it takes years to put aside a good amount to live on in their final years.

Types of Retirement Plans

Retirement plans are available in several varieties. A defined contribution plan requires an employee to make contributions over a period of time, such as the 401 (k). Alternatively, one can select a defined benefit plan is a pension where the employer makes all the contributions. This type of retirement plan ensures that the employee has a set payout upon retirement.

The most popular retirement plans in the United States are the defined contribution plans. The defined contribution plans appear more straightforward to implement as there is less pressure on the employer. Furthermore, they are the more affordable option for the employers who may choose to match a small contribution by the employee so as to build up the amount saved.

With the defined benefit plans, the employer may select to offer a cash balance plan or traditional pension. Once minimum qualification criteria have been met, employees automatically get enrolled. However, in order to get the benefits of this plan, there may be a minimum number of years that they have to be with the employer. If an individual needs to leave employment before they attain retirement age, then the cash balance lump to can be put into an IRA. It is worth noting that the traditional pension is not portable in the same way.

How do Retirements Plans Help Employees?

The funds that employees place into retirement plans are put aside for investment so that they can grow over time. Typically, they are a portfolio will include a range of investment options and over time money each option gets an amount of money. These options consist of money market funds, mutual funds, stocks as well as annuities,

Ideally, the best retirement plan options are the defined contribution plans as one has greater control over what they will receive in the end. If an employer offers a defined benefit plan, it is still advisable to have a defined contribution plan as well to ensure a sizeable amount available during retirement.

Related Articles