Retiring is an exciting step in an individual’s life. Living off of the benefits of years of labor is satisfying for anyone looking forward to retirement. Nowadays most employees usually fund retirement using either a 401k or a Roth IRA combined with Social Security. However, many people forget about another method of funding retirement, Pensions.
What is a Pension?
A pension is a percentage of a person’s salary paid out for the rest of their life after working a certain amount of years at a company, thus assisting in funding retirement. The government typically pays pensions, but some companies (although fewer than in the past) still offer pensions to employees. Pensions are valuable to those looking for alternative ways to fund retirement.
Pensions are NOT the same as a 401k, but both are company-sponsored retirement plans. The majority of private companies offer a 401k plan for employees. Employees and sometimes the employer contribute to a 401K plan, usually the employer matching the funds added by the employee.
A pension is solely funded by the employer. The employer also controls the payout. Pension payouts are usually made after a minimum time of service at the organization and reaching a specified age. Today the most common pensions are government workers and for military service. Pensions are lost if the employee departs the organization before reaching the minimum requirements. A 401K fund on the other hand is a transferable fund. Once vested, the employee can convert the fund into another IRA fund or keep in place until reaching the age to begin withdrawals.
Can I Receive Social Security with a Pension?
Government employees do not receive Social Security and will rely solely on their pensions. Most government employees do not contribute to Social Security; therefore, they cannot collect it upon retirement. However, if you receive a pension from a private company, you can collect both Social Security and your pension.
Are Pensions Taxed?
On federal and state income taxes, pensions are taxed as income. Some states offer exemptions for some pensions such as military service pensions so check with your state revenue department. If you fund your retirement using a private company pension, understand there are no tax incentives like there are for a 401k or Roth IRA which are wholly or partially funded by your earned income. It is beneficial to always invest in an individual retirement fund while working as an employee to increase and protect funds for retirement.
What are the Risks of a Pension?
Risks are involved in every method of funding retirement. Funding a retirement fund takes years of uncertainty and investing. Pensions, on the other hand, are less risky than a typical 401k or Roth IRA. If a company declares bankruptcy, does not perform well, or faces other difficulties, the benefits of the pension may be reduced. Nearly every private pension is insured by the Pension Benefit Guaranty Corporation, significantly reducing your risk.
Employees often overlook pensions because many believe they have gone extinct, but this is not the case. Pensions are still alive and used actively by some large companies as a way to fund employee’s retirement. If you are not sure if your company offers a pension plan, ask them. It never hurts to see if extra money is sitting around waiting for you.
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