Depends on the pension. A defined benefit pension is one where the payout is dependent on years of service, pay scale, etc and the company guarantees the pay out amount for the retirees life (like an annuity). Defined contribution is where the company puts a specific amount in for each participant- it can vary depending on company profitability and generally requires the participant to manage the investments in the plan (like a 401k). My company has a cash balance plan in addition to our 401k. After a year of employment, they deposit 6% of comp to a plan and pay a fixed interest rate of 6%. After 3 years a participant is 100% vested. A pretty good deal. Pensioners do have some protection from the pbgc (pension benefit guarantee corp), so if your company's pension plan is terminated, all won't be lost. But to some of the points above and in other retirement threads, it is wise to not depend on "the company" for retirement. Max out 401ks, fund traditional and Roth IRAs as much as possible. Determine what you'll need in retirement and keep tabs on where you're at so you're not surprised when it's time to stop working.
pension plans seem to be a thing of the past. You can go to the bank and open up your own 401K, there are many different types available. The major difference is you will not have an employer matching what you put in or even contributing a percentage. It is actually sad, there was a time when companies would offer benefits like a pension to entice the best educated people to come on board. This is happening less and less do to changes in regulations and tax structures. Thinking about your retirement is wise, but don't put all those nest eggs in one place, annuities are fine if you can have that money tied up for a long time. They are not as fluid as some investments so be prepared to leave it alone. But there are other things to do short of the stock market or savings plans. Savings plans pay very little, there are some CD's available if you look around and even some of them have low return. One of the first things to ask yourself is how risk adverse you are? Take into consideration your age, earning potential and current overhead.
I definitely recommend diversification and NOT putting anywhere near a majority of your $ into annuities or other insurance products. An annuity is mainly something that can be a small part of one's retirement plan, and is best for those who have at least 6 figures in assets who can put a lump sum of say at least tens of thousands into one to start off. Annuities are often best purchased using a portion of one's work plan after retiring and rolling the plan over to a firm or bank. If you retire from Exxon or wherever after several decades of service with say $750k or a million or 2 or 3 or whatever, you can perhaps consider putting maybe 10, 20, 25% into a better annuity for a lifetime stream of income, a death benefit outside of the taxable estate, sheltering $ from creditors and potential lawsuits, etc. Other types of life insurance products can also be useful for tax advantages and to shield $ from creditors and potential lawsuits, etc. These are typically best for people in higher tax brackets and with above average wealth and assets. Annuities and other insurance products that fall under whole / universal / variable and carry pretty high fees are generally not the best investments for younger people with limited assets and average or below average incomes who are in the lower tax brackets. Better for those among you to stick to a simple term life policy and invest your money directly into things like stocks, mutual funds, etc via IRAs, work 401ks, taxable brokerage accounts, etc.
The tax-advantaged 401k and similar plans are done through work. IRAs and similar plans are done on your own through banks and brokerages. 401ks, IRAs, SEPs, etc all have different contribution limits as well.
Rhoda D'Ettore, that was a great question. It is an issue that is pertinent to our modern times and economy. Pensions are a luxury of the past. My friends and I have pensions because we were public school teachers. The federal, state, county and all municipal employees were given pensions because we were never given high salaries like our counterparts who worked in private industries. As of 2010 most municipal, state and federal employers stopped offering pensions. However, a pension is similar to an annuity. JR Ewing wrote, "If you don't have a pension at work, you can consider dropping a lump sum into a better variable annuity that offers an "income for life" option, with options to continue the payments to beneficiaries or the option to offer a lump sum death benefit." He is correct. People who saved money in their 403b, or Roth IRA have accumulated a lump sum of money by the time they are sixty years old. Some people give 1/2 of lump sum to a fixed annuity. That fixed annuity will never increase. Most pensions will give a 3-6% annual increase just like our Social Security COLA payments. Next, some people place the other half of that lump sum into a variable annuity. That is an instrument where if those funds make 8% interest, then you would withdraw that 8% without touching the principle. Some people may make 8% but only withdraw 5%. That would allow those funds/principle to grow instead of remaining at the same amount of money.
Good post Allison. Teacher retirement plans in my state are very good for the retirees. When I was building my client base, I soon found out that teachers I solicited tended to already be very well set up through the state and didn't usually need my services - unless they had extra money from somewhere other than their job - like if their spouse had a job in the private sector, or if they'd just inherited some money or whatever. The state even subsidizes them against losses in at least some of the plans.
Municipal employees were taught to have at least a three legged stool. One leg was your pension. The second leg was Social Security. The third leg was suppose to be our 403b. Currently, quite a few people will tell you to add a Roth Ira. We needed all of those savings tools because the state may not 100% fully guarantee your pension. Have you ever heard of municipal governments claiming Chapter 9 Bankruptcy? I believe Stockton, Ca tried to renegotiate all creditors. Well, pensions, legacy obligations, are considered to be just another creditor. Those are reasons why teachers and librarians were notoriously known to over save for their old age!
I do not know of a single employer that offers a pension these days. It seems as though everyone is on the 401k bandwagon. This is a good thing because you can take this plan with you anywhere just about.
Employers simply can't support all those expenses, I mean, if not even the state can support them how can private companies do it? Sadly we pay taxes all our lives and need to work on a retirement plan on the side.
Yeah, that's the problem. People are living longer and longer, and governments and companies cannot continue to pay them for 30-40 years after they retire. Insurance companies who do the "income for life" annuities are certainly taking a risk themselves, but they are usually actually profiting because of the fees they charge each year.
