Tips & Topics - Retirement
Understand Your Retirement Plan
If your employer provides a retirement plan, you may think that you’re all set. But there are steps you can take to make sure. Many financial counselors advise that you will need at least 75 to 85 percent of your preretirement income to enjoy the same standard of living once you retire. How well will your retirement plan provide for your needs, when you first retire and years later? Before you can answer that question, you need to know what kind of plan you have and understand the benefits it provides.
- The U.S. Department of Labor publishes a guide, What You Should Know About Your Retirement Plan, to help you understand how your plan works and what benefits you can expect in retirement.
Defined Benefit Plans
With a defined benefit plan, your pension is based on a formula that often includes factors such as your salary and the number of years you’ve worked for your employer. Your employer is responsible for investing the money for the pension, but investment returns do not typically affect the amount of your pension. If the investments don’t perform as well as expected, your employer would cover any shortage. Because your pension is determined by a set formula, you can come up with a good estimate of your pension, if you understand how it’s calculated. Check with your human resources office for specific information about your retirement plan.
- The U.S. Department of Labor provides information to help you understand many of the retirement programs available in today’s marketplace.
- The Pension Benefit Guaranty Corporation (PBGC) was created by the Employee Retirement Income Security Act of 1974 and protects the pensions of nearly 44 million American workers and retirees in more than 29,000 private single-employer and multi employer defined benefit pension plans. The PBGC’s search engine allows you to determine if your plan is guaranteed under current guidelines.
Defined Contribution Plans
Many employers offer 401(k) plans (or 403(b) plans for public school teachers and employees of nonprofit organizations) instead of more expensive defined benefit plans. With these plans, contributions are deducted from your salary and deposited into your account. Since the contributions you make are tax-deferred, your taxable income is reduced. Generally, your employer matches some or all of your contributions.
With defined contribution plans, you decide how to invest your contributions among choices established by your employer. Returns on your investments are credited to your account and earnings accumulate tax-free until you withdraw your funds. When you retire, the funds in your account provide your retirement benefits. Although a defined contribution plan gives you the freedom to choose how your retirement funds are invested, it does not guarantee you a fixed payment. If the investments don’t perform as well as you expected, you may come up short at retirement. Also, the PBGC does not guarantee benefit payments for defined contribution plans.
- The U.S. Government Services Agency (GSA) provides information and links to other resources to help you learn more about 401(k) plans. The IRS also provides answers to frequently asked questions about pensions, annuities and other retirement plans like 401(k)s.
- Employee participation has been limited for many defined contribution plans, which could leave a great number of workers without income in retirement. The Government Accountability Office issued a report highlighting the challenges of low participation rates nationwide.