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Make Your Pension Plan Work for You

Make Your Pension Plan Work for You

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Daniel Cohen
UpdatedFeb 19, 2015
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    3 min read
Key Takeaways:
  • Pension plans are an important part of your retirement income.
  • Balance your needs between IRAs, 401ks, Social Security and other retirement plans.
  • Review your needs and adjust your pension plans.

Get a Pension Plan that Fits Your Needs

Pensions were developed in European countries early in the 19th century. They arrived in the United States in 1875.

By 1997, about half of all workers had pension plans.

Originally, employers offered pension plans to provide deferred income to employees after they retired. By the 1990s, more employers turned to 401(k) plans that encourage employees to contribute to their own retirement funds. Now, in many companies, pension plans are falling by the wayside.

Whether or not you have an employer pension, a successful retirement plan begins with understanding your retirement benefits. Look at every aspect of your anticipated retirement income, determine how much income you will need to retire, and arrange to fill any gaps so you can enjoy your golden years.

Below are five tips to help you plan for your retirement.

Understand the pension

Two types of pension plan exist. A defined contribution plan means the employer places an amount of money in a retirement account on the employee's behalf. With a defined benefit plan, the employer promises the employee will receive a certain amount of funds (benefit) upon retirement.

Defined benefit plan funds are customarily insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency to which employers pay premiums. In 2006, 43 percent of workers participated in a defined contribution plan, while 20 percent participated in a defined benefit plan. In recent years, the 412(i) pension plan has become a viable retirement savings vehicle for successful small-business owners.

Add the value of a 401(k) plan

Some organizations offer a defined contribution plan -- such as profit-sharing or other investment -- as well as a 401(k) plan. Employees contribute to the 401(k) plan, and employers may or may not match their contributions. Online calculators can help estimate the eventual value of your plan at the time you retire. Example: Retirement Planning Calculator

Evaluate Social Security

Younger workers tend not to count on Social Security, however they should still understand current planned Social Security benefits. Workers automatically receive a summary of their estimated Social Security benefits annually a few months before their birthday. For most people, these benefits will not be enough to support their current lifestyle during retirement. The Social Security summary is a great annual reminder to contribute to your own retirement investments.

Look into IRAs

An IRA (individual retirement account) allows workers to save for their own retirement, instead of or in addition to an employer retirement plan. People under age 50 can contribute up to $5,000 per year; those 50 and older can contribute up to $6,000. Depending on income, contributions can be made tax-free (with a traditional IRA) and taxed upon withdrawal, or made after taxes (Roth IRA) and withdrawn tax-free during retirement.

Calculate needs

A ballpark estimate is that retirees will need 70 percent to 80 percent of their peak annual salary for a comfortable retirement. Add up anticipated expenses: costs for home payments and maintenance; food, clothing, utilities, transportation and other necessities; hoped-for expenditures on luxuries like dining out and travel; and a realistic estimate of medical expenses. For a personalized blueprint, a financial planner can help craft a detailed plan for retirement and beyond.