A Guide to Pensions & Retirement Benefits

Charlie Ward, CFP® | Jul 19, 2024

What Are Retirement Benefits?

Retirement benefits are financial resources designated as income for someone who has worked and started their life as retirees. Typically amassed while in the workforce, retirement benefits are intended to replace wages, and they can come from various sources, including:

Government programs, like Social Security
Employer-sponsored plans, like pensions and 401(k) plans
Personal savings and investments, like IRAs

The primary goal of retirement benefits is to ensure financial security for individuals when they are no longer earning a regular income from employment.

Types of Retirement Benefits

Retirement benefits can take various forms, with some of the more common types including:

Pensions: Pensions are typically employer-sponsored retirement plans that provide a fixed income to retired employees, based on their salary and years of service. As a specific type of retirement benefit, pensions are often associated with “vesting” periods, and they can be paid on a monthly basis or in lump sum payments.
401(k) plans: These plans allow employees to save and invest part of their salary, often with matching contributions from their employer. The funds in these accounts grow tax-deferred until they are withdrawn during retirement.
Individual retirement accounts (IRAs): As investment vehicles for saving independently of an employer, IRAs can offer various tax advantages while diversifying retirement benefits and an overall investment portfolio. Essentially, that can make IRAs a viable way to build a substantial nest egg.
More: Employee stock plans, special annuities, and government pensions are just a few of many other types of retirement benefits. Some sectors, like the public service and non-profit sectors, can have their own distinct options here too.

Well-rounded retirement plans tend to include multiple income streams, providing for more than one type of retirement benefit to support an individual’s financial future.

Now, let’s take a deeper dive into pensions specifically, looking at their pros versus potential cons.

Advantages of Pensions

Pensions are among the more popular types of retirement benefits for good reason. Specifically, some key advantages of pensions include that they are associated with:

Steady income streams: Traditional pension plans can provide “guaranteed” income in retirement. Unlike other retirement savings plans that depend on market performance, pensions can offer a more stable, predictable source of income, ensuring financial security throughout retirement.
Employer contributions: Pensions are typically funded by employer contributions, which means employees do not have to put as much of their own money into pension plans when compared to other retirement savings plans, like 401(k)s or IRAs. This can significantly ease the financial burden of building up pensions during working years.
Risk mitigation: With pensions, the investment risk is generally borne by the employer or the pension plan provider, not the employee. The flip side of the coin here is defined contribution plans (DCPs), which tend to put the investment risk on the individual while making more volatile markets particularly challenging.
Spousal and survivor benefits: Many pension plans offer spousal and survivor benefits, providing a means for the retiree’s spouse or dependents to continue to receive income in the event of the retiree’s death. This feature can provide additional peace of mind and financial security for many retirees and their families.

Disadvantages of Pensions

As useful and crucial as pensions can be in a retirement plan, there may be some potential drawbacks associated with these types of retirement benefits. Those can include:

A lack of portability: Pensions are often tied to a specific employer, making them less portable than other retirement benefits. In the event of frequent job changes, employees could lose out on pension benefits they’ve accrued with previous employers.
Funding and solvency risks: Pension plans can rely on the financial health of the sponsoring organization. If a company is under increasing economic challenges or financial difficulties, the risk of underfunded pensions can spike.
Limited control: Employees have little to no control over how pension funds are invested, as these decisions are typically made by the pension plan administrators. This lack of control can be less than ideal for anyone who prefers a more hands-on approach to managing their investments.

Inflation risk: Many traditional pension plans do not automatically adjust for inflation, meaning the purchasing power of the pension income can erode over time. Without cost-of-living adjustments or other retirement benefits, retirees may find their pension income insufficient to cover rising expenses in the future.

With these disadvantages, it’s essential to keep in mind that:

Different people may be more or less vulnerable to these possible drawbacks.
There may be options for limiting or mitigating these disadvantages to leverage pensions in retirement plans with optimal success.

Tips for Choosing a Retirement Plan

The right retirement plan for you may not be the same as what’s best for your friends, colleagues, and anyone else. That’s because retirement can be a deeply personal event, and the plans and steps you take in the lead-up to retirement can be crucial.

To help you make prudent moves now, use these three tips to dive into — or reconnect with — retirement planning:

Assess your financial goals: What do you want in retirement? Where do you want to be and what do you want to do when you retire? Consider your answers to these questions to start pinpointing your goals, expected expenses, and lifestyle in retirement. This can begin to dial in your big-picture objectives while showing you which savings instruments could be more beneficial.
Understand the fine print: Before opting into any retirement plan, get familiar with the terms, conditions, and key rules regarding contributions, withdrawals, loans, and penalties.
Diversify: To minimize any potential risks, diversify your retirement savings across different types of accounts. This can potentially provide some insulation from market fluctuations and other uncertainties.

Retirement benefits can shape your life as a retiree, offering financial stability, reliable income, and more comfort in your post-work life. No matter when you start retirement planning — or when it’s time to take a fresh look at the plans and strategies you’ve been relying on — the more you know about retirement benefits, the better.

Beyond that, turning to a trusted financial professional can help too, keeping you on track as life changes, so you’re better prepared to set yourself up for your dream retirement.

SOURCES

This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.

A Guide to Pensions & Retirement Benefits