About 43% of American employees have individual retirement plans, according to the U.S. Bureau of Labor Statistics. Especially during hard economic times, retirement plans are crucial for employees looking to enjoy their golden years without financial worry. Much of how you will determine your retirement savings plan depends on where you are in your life and career. If you are a recent graduate just starting out, it is not necessary to invest as much into your 401(k) as someone who has been working for 30 years and is much closer to retirement age.
As a new employee, it is up to you to find out all the pros and cons of your retirement or pension coverage. The benefits of matching company contributions to retirement plans are crucial when it comes to planning for the future as well, so you have to make sure you ask the right questions when you’re setting up your investment strategy. The first thing you’ll want to find out is if you have a matching contribution plan (like a 401(k)/IRA) or if you have a pension plan.
Matching Employer Contributions to 401(k)s
Traditional 401(k) plans are set up to include a pre-determined deduction from employee wages as well as a contribution from the employer. This contribution can vary greatly, depending on how much you put in and how much you make in salary. In general, though, employers must match your contribution up to certain limits. Your Modified Adjusted Gross Income, or MAGI, determines your maximum individual contribution amount. For many people, this is a yearly sum of no more than $5,000 in individual contributions. 401(k) plans are known as defined contribution plans for this very reason, whereas pensions are known as defined benefit plans.
Alternative Savings: Pension Plans
According to the U.S. Bureau of Labor Statistics, only 20% of American workers have pension plans. This is a huge difference from the statistics of just 40 years ago, when more than 40% of employees had pensions. Pension plans are different from traditional retirement or 401(k) accounts in that they require vesting and often pay out more than an IRA (although not always).
These plans reward you for years of service to your employer by paying a pre-determined sum monthly after you retire. This amount is calculated based on how much you earned and how long you worked for the company. You typically can’t be vested in a pension plan until you’ve worked for a company for at least a year, but some require up to five years of work history before they kick in. Either way, pensions are designed to offset retirement accounts and social security to provide you with enough income to fund your golden years. They are thought of to be more stable in volatile economic times, but recent recession scares have even muddled the verdict on this issue.
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