For todays working folks, retirement planning looks much different from how it did for their parents and grandparents.
This change is driven by a shift in the throw in of retirement plans now offered in most workplaces.
Your grandparents may have retired with pension benefits.
Youre more likely to rely on a nest egg you build up in a 401(k).
The two plans actually have little in common.
Today, many government entities still offer traditional pensions, but they are rare in the private sector.
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The main difference between the plans is in who bears the investment risk.
In a pension, all the risk is on the employer.
Considered a defined benefit plan, a pension pays a fixed amount, for life, to retirees.
Its determined by how much money you invest and how well those investments perform.
That means all the risk is on you.
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Why such a dramatic shift?
Theyre expensive for employers.
Pension plans are typically funded entirely by employers, though not always.
Pension Plan Payouts
At retirement, employees in a pension plan receive a fixed payment each month.
The benefits are for life, so theres no risk of running out of money.
Whats important for someone considering a job with a pension?
First, government salaries tend to be lower than the private sector.
They allow employeesandemployers to invest funds toward the employees retirement.
In 2023, the limit rises to $22,500 in 2023.
On top of employee contributions, many employers provide a match.
Many employers match 100% of employee contributions up to 3% of salary.
Most people cant afford to contribute the maximum amount to their 401(k).
If you contribute to a traditional 401(k), the money is tax-deferred.
However, you will pay taxes on that money when you withdraw it during retirement.
But historically, the market goes up.
You know exactly how much you will have each month.
Talk about peace of mind in retirement.
Workers nowadays tend to prefer to change jobs more frequently throughout their careers.
Changing jobs is easier when you have a 401(k).
Low Stress: Pension Plans
Pension plan investments are set and managed by professionals you dont get any say.
And because the plan guarantees the benefits, the money is typically invested very conservatively.
A 401(k) is much more subject to fluctuations in the stock market.
Investment Flexibility: 401(k)s
With that risk comes opportunity.
Timothy Moore is a market research editing and graphic design manager and a freelance writer.
He lives in Ohio with his fiance.
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