Retirement Planning

What’s The Difference between a Pension and a Retirement Plan?

Two of the most common types of retirement plans that people are familiar with are a pension and a 401k. While both of these retirement plans help you save for your future, there are a few key differences. Read on to understand the difference between a pension vs a 401k.

Pension vs. 401k - What's the Difference?

These days, it seems that everything you read or see on television has something about saving more for retirement. It's not that saving for life after your paycheck stops is anything new, but that we're having to more with less, and take retirement planning in our own hands.

The fact is, most of our parents had this whole retirement thing in the bag by leaving it up to their employers to figure out how to pay for their retirement via the pension plan. Today, with fewer employers offering pension plans, most of us are having to look into other alternatives in order to stash away more of what we'll need for a comfortable retirement.

So what's the difference between a pension and a retirement plan? Actually, a pension is a type of retirement plan. However, it works differently in that contributions are funded and invested by your employer on your behalf. These types of pension plans are called defined-benefit plans.

With a defined-benefit plan, you employer sets aside money into an investment pool that is used to pay pension benefits to retired employees, usually based on some formula of number of years worked for the company, earnings and age. For example, your employer may promise you a pension benefit that's equal to one percent of your average salary over the last five years times your total years of employment with the company. With this plan, your employer essentially guarantees that you'll receive a defined amount of money when you retire, regardless of how the investment pool performs. Unfortunately, many of us won't experience the benefit of a guaranteed pension at retirement as pensions are becoming few and far between.

A defined-contribution plan is a more common retirement saving vehicle that most of us are familiar with through our place of employment. You'll recognize it as a 401(k) plan.* With this type of retirement account, both you and/or your employer contribute money to your account. These types of funds are typically self-directed, meaning that you, the employee, are responsible for choosing how your contributions are invested, as well as how much you want to contribute from your paycheck through pretax deductions. If you're lucky, your employer may match a certain percentage of your contributions, allowing you to grow your retirement savings that much quicker. However, unlike a defined-benefit plan, your employer isn't promising you a specific benefit amount when you retire, and what you end up with depends on how well your investment choices have performed. To learn more about 401k plans, visit our 401k Basics Guide.

To ensure your future financial security, it's essential that you save for retirement. If you need help to better understand your investment options or to select retirement plan that best meets your objectives and goals, consult with a qualified financial advisor.

*Types of 401(k) plans include: traditional 401(k), safe harbor 401(k), SIMPLE 401(k), and automatic enrollment 401(k) plans.

 

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

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Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax‐related decisions. For information about Protective Life and its products and services, visit www.protective.com.

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Pension, 401k And Your Retirement

There are many different types of retirement plans. If you've been doing some research and wondering what the difference between a pension and a retirement plan is, this article may help clarify how retirement plans are defined. Here, we'll look at the basics of a defined-benefit pension plan and a defined-contribution plan. For more information, visit the Protective Life Learning Center.

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