S.T.E.P.S. – Smart, Tailored, Event-Driven, Packaged Solutions
Pensions — Part III
Pensions are another important retirement savings vehicle that can effectively supplement what the government provides.
Although 50% of American men over 65 currently receive a pension, only 20% of American women do.
There are three main types of pension plans:
In this section, we will take a closer look at employer provided qualified retirement plans, or pensions.
Employer Provided Qualified Retirement Plans:
As a benefit for employees, many companies provide employee retirement plans. These are some of the best-constructed and easiest ways for you to save for retirement.
HerTip: A pension plan is an “easy” way to save because the money comes directly out of your paycheck. It’s impossible to spend money you never receive!
How do I know if my company offers a retirement plan and if I qualify?
Your company’s human resources office should have all of the information you need to determine whether or not you are able to participate in a retirement plan they might offer. Here are a few good questions to ask:
- Does our company offer any retirement plans? What kinds?
- Who pays for the plan? What are the payment options?
- What are the benefits of the plan?
- Am I included in the plan
- Have I worked long enough for the company to earn a pension or be eligible for profit sharing?
- May I have a copy of my personal benefit statement?
- What happens to my plan if I retire early?
- What happens to my plan if I change jobs?
- Is our plan insured?
HerTip: Under a Federal Guarantee Program, even if your company goes out of business, you could still receive your retirement savings. Contact the Pension Benefit Guaranty Corporation (PMGC) for details at www.pbgc.gov
What are the different types of Employer Provided Retirement Plans?
There are two main options provided by employers:
It is up to the company you work for to decide which type is made available to you. Let’s take a closer look at each now.
1) Defined Benefit Plan
A Defined Benefit Plan gives you a predetermined monthly income stream (or benefit)at retirement.
How it works:
To qualify for a Defined Benefit Plan, you must be vested, which usually implies that you’ve worked for your employer for 5 to 7 years.
Your employer is responsible for funding the plan and choosing managers to invest the funds. It is the company’s responsibility to ensure that the invested funds earn enough of a return to deliver the promised employee benefit.
HerTip: With defined benefit plans, you do not have to worry about how funds are invested because your benefit is generally guaranteed under almost all circumstances.
Pay-out:
The amount you receive in payment upon retirement usually depends on the number of years you worked, your age at retirement, your option choice and your salary during your employment. Companies use different formulas to determine rate of return benefit, and also to determine how you will receive your payment.
HerTip: Some corporations have been trending away from Defined Benefit Plans, and converting these plans to Defined Contributions. Keep abreast of the employer retirement communications at your company and be sure to reassess your retirement savings annually.
2)Defined Contribution Retirement Plans
Unlike Defined Benefit Plans, Defined Contribution Retirement Plans do not obligate the company to pay a certain pension benefit. Instead, you may choose a defined contribution which your employer may or may not match.
There are two main types of defined contribution plans: profit sharing plans and money purchase plans. These plans come in many forms. Some of those that you have probably heard of include:
- 401(k)- Private company
- 403(b)- Tax Exempt Organizations
- Federal Thrift Savings Fund- Federal Employees
- 457- State and local government workers
Among many other provisions, the new Bush tax law has made it easier for workers to save for retirement in their 401(k) accounts. Starting in 2002, the annual contribution limit will be raised from $10,500 to $11,000. What’s more 401(k) plan members who are 50 years of age or older can put an extra $1000 into their account each year. This “catch-up” amount rises $1,000 per year until it reaches $5,000 in 2006. Lastly, the new law raised the limit on combined contributions by employers and employees to $40,000 or 100% of your pay, calculated on the first $200,000 you earn.
How it Works:
Although Profit Sharing Plans and Money Purchase Plans have their differences, they operate in basically the same way: Your contribution is automatically taken from your paycheck, given by your employer or a combination of both. The money is deducted from your salary before being taxed at the federal level.
Although your contributions are federally tax free, they are often subject to both state and social security taxes. You are responsible for investing your savings — normally within a range of choices.
HerTip: You are always subject to income taxes when you take money out of your retirement account. If you are under 59 1/2, you may be subject to an additional 10% excise tax. Be sure that the money you put away can be kept away, because taking money out of a retirement account early may hurt your financial future more than help it!
Pay-out:
The amount you receive at retirement depends on how much you put in the plan over time, how long you’ve been working, the option you’ve chosen, and your return on your investment.
HerTip: In a profit sharing plan, if your company does not make a profit, there are no contributions made to your plan.
Job Changes
Most women stay at the same job for an average of 4.5 years. If you switch jobs, all of the plans we’ve discussed in this section offer several options for the funds you’ve already accumulated:
- Leave money in the previous employer’s plan: Although not always an option, this could be the safest and easiest option you have. Unfortunately, by leaving money in different spots, you could lose track of it. Also, if you open an additional retirement account, you may lose some interest appreciation by not combining the funds.
- Take money out as a lump sum: Prior to retirement, taking out your pension money can have serious tax implications. Although having the additional money right away sounds appealing, unless absolutely necessary, the tax consequences can far outweigh the positives. If this is an option that you are considering, we recommend you speak with an accountant or certified financial planner first.
- Roll- over the money into your new job’s pension or into your IRA: This option enables you to hold on to your retirement savings without tax consequences. Before you make this decision, make sure that your new investment vehicle will surpass your current return.
What happened to my pension from my last job?
If you earned a pension at a previous job and are unsure of its status, contact your previous employer or the pension plan managers directly to get information on the benefits you are entitled to.
For help in locating your benefits from a private-sector pension plan that no longer exists, contact Pension Benefit Guaranty Corp. (PMGC): www.pbgc.gov or call 202-219-8771 or write:
PWBA Public Disclosure Room
US Department of Labor
200 Constitution Avenue NW, Room N-5638
Washington DC 20210.
HerTip: The size of your retirement benefit should be a factor in your decision to switch jobs. Each time you change employers, you start at the beginning in terms of accumulating pension benefits.
Continue to: Part IV: Individual retirement accounts (IRA’s)
In this course, we will cover the following: