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What You Should Know About Pension Plans | Retirement for Seniors
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What You Should Know About Pension Plans

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You’re only young once but you can be immature all of your life.
–Charles Scoggins

Pension plans, which are designed to guarantee workers an income in their retirement years, have been offered by private companies as well as governments for longer than a century in the United States, Great Britain, Germany, and elsewhere; since then, pensions of one form or another have become available to at least some workers in most countries in the world. Pension plans have evolved over the years, and have often been a bone of contention between labor and management.

Pension Benefits

A traditional pension plan is a “defined benefit plan”: the benefit — the check that each retired worker receives each month — is a fixed amount for life. Various factors contribute to determining the size of this monthly check: the employee’s pay, age at retirement, total number of years of employment, and more. Some formulas are simple (offering $100 a month for each year of service, for instance); others are more complex (the Final Average Pay method calculates an employee’s average salary during his or her final years of service, and bases the benefit amount on that).

Defined benefit plans are becoming less and less common; they tend to be less portable than 401(k) plans (see below), and they expose the employer to risk. Because payments to retirees are constant over the years, the employer faces all the investment risk inherent in investing the money that funds pensions payments, while the retiree faces no investment risk whatsoever, short of insolvency on the part of the former employer.

These days, employers tend to offer a “defined contribution plan,” the most common of which is the 401(k): employees, during their years of employment, pay contributions from their own salaries into their own individual retirement accounts, and it is the employee’s responsibility to determine how that money is invested. (A company will offer several choices — usually a basket of stock and bond mutual funds.) Employers might offer matching contributions. The retirement account then grows, or doesn’t grow, depending on the market performance of the underlying assets. An employee can take his defined contribution plan with him if he transfers to another job, and on retirement, he generally receives a lump sum distribution, which he can then reinvest or distribute as he sees fit.

Defined contribution plans are also tax advantaged. Contributions are all pre-tax, and no taxes are due on any interest, dividend, or capital gains earnings that accrue over the years. Tax is only due on withdrawals, which are taxed as ordinary income, though any withdrawals you make prior to turning 59½ years of age are penalized an additional 10 percent.

With a 401(k), it is the employee who assumes all the investment risk. If an employee’s 401(k) is fully invested in the stock market, and the market crashes just before retirement, that employee faces a devastating situation. It is very important for employees to monitor their 401(k)s carefully, ensuring that they transfer the assets held in their accounts to safer investments as they near retirement. Companies that offer 401(k)s or other defined contribution plans generally have trained staff members in their human resources departments who can advise employees about their plans.

While employers generally favor defined contribution plans, because they can pass investment risk on to their employees, there has been some criticism of such plans, especially since the stock market crash of 2008 left countless people near retirement age with vastly diminished nest eggs. The crash certainly quieted talk of privatizing the U.S. Social Security system, which would have effectively converted that ultimate safety net from a defined benefit plan to a defined contribution plan as well.

Whatever kind of pension plan you have, it’s important that you keep track of it and stay informed about developments that may affect your plan. If you have a 401(k), don’t just let it idle: examine your statements, note performance, and make adjustments to your asset mix as appropriate. If you can, make the full contribution every month, and make sure you’re getting all the matching contributions that are due to you. Stay informed about broader financial developments; attempting to “time the market” is a fool’s game, but if some of your 401(k) is invested in a high-flying stock fund that has brought good returns over a period of time, it might be time to shift some of those earnings to a safer asset. Remember the disclaimer that every mutual fund must broadcast: past performance is no guarantee of future results.

If you have a traditional, defined benefit plan, you may feel safe, but occasionally a company will default, and pensions will not get paid. In 2005, a federal bankruptcy court ruled that United Airlines could default on its pension obligations, affecting 122,000 workers and retirees. If you believe your company is in financial difficulty, stay informed and, to the degree possible, get involved with other employees (or your union, if the company is unionized) to protect your rights. There may be nothing you can do, but don’t take a back seat.

Bond Calculators

What is a Bond Calculator

If you want to find out the current value of your bonds and how much interest they are paying you, then the fastest way is to use the Bond Calculator. Different people opt for different options to assess and estimate the outcome of their saving bonds investment. Home Loan calculators helps to detail you the exact information related to your saving investment.

Bond Valuation Calculator makes it easy to calculate the market value of a bond. To use our free Bond Valuation Calculator just enter in the bond face value, months until the bonds maturity date, the bond coupon rate percentage, the current market rate percentage (discount rate), and then press the calculate button.

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