We were created to work—in jobs we love. But not everyone is in a job that makes them dread their retirement party. So if you’re one of those people (and retirement can’t come soon enough), we can help. Because just dreaming about the perfect retirement won’t actually give you the dream retirement you’re hoping for.
One of the best ways to make your retirement a reality is through proper planning, saving and investing. So if you’re looking for pension advice (and answers to all of your retirement questions), you’ve come to the right place.
What’s a Pension Plan?
A pension plan, often called a deferred benefit plan, is a company-sponsored retirement plan that “guarantees” you a monthly check once you retire. Traditional pension plans are funded solely by your employer based on your salary, age and the number of years you worked.
That means you don’t have to save any money for retirement if you have a pension, right? Wrong.
Since the pension is completely funded by your employer, it’s also their asset, or money, until it actually hits your account. A company has full control over the pension plan, from how much they contribute to what happens to the money if they go out of business.
You’ve probably heard your grandpa talk about his pension plan. Either he was excited to receive his check each month or he was constantly watching his company’s stocks to make sure they were going to make it through the recession. You may have even heard him say, “Poor Jim lost his pension when the mill closed.”
Many companies insure their pension plans with the Pension Benefit Guarantee Corporation (PBGC).1 So if your company goes bankrupt, it doesn’t automatically mean that you’ll lose all of your pension. That’s what the PBGC is for. But it doesn’t mean that your retirement won’t be impacted or that you’ll receive the same amount of money as you were hoping.2 Your pension might be terminated (and you’ll receive a lump sum) or you’ll be receiving your retirement checks from the PBGC—but only if your pension is covered.
Let’s dig a little deeper: With these types of retirement accounts, you have to rely on your employer to make wise investing decisions on your behalf. You have absolutely zero control over how the account is handled, what goes into it, and how it grows (or doesn’t grow). Yikes.
“The goal here isn’t ‘how little can I save?’ The goal here is ‘how wealthy can I become?’” — Dave Ramsey
What Is a 401(k)?
A 401(k) is an employee-funded retirement account, also called a “defined contribution” plan. These plans are often offered by your employer as a benefit to help you save for your retirement. And if you’re lucky, your employers will often match what you put into the account every single month (up to a certain amount).
These days, more and more companies are skipping the pension and opting to offer employee contribution plans like 401(k)s or 403(b)s, which are like a 401(k) but for nonprofits. And as of 2018, only 21% of workers participated in a pension plan.3
This type of account has been gaining in popularity for quite some time as the amount of pension plans offered continues to dwindle. You see, when you invest in a 401(k), you have total control of the account, the investment decisions, and the amount you decide to invest each month. Why? Because it’s your money and your savings. And since it’s your money, you’ll never have to worry if your employer will file Chapter 7 bankruptcy or how much money you’ll actually receive when you reach retirement age.
401(k) vs. Pension: What’s the Difference?
What’s the average rate of return?
12% or more
What happens to the money when I die?
Passed down to your heirs
Dies with you or sent to your spouse at a lower amount
Who owns the account?
How long do the checks last?
Until the money is gone
Do I have a say in the investments?
Can the money be moved to another account?
How much will you need for retirement? Find out with this free tool!
Looking for pension advice or wondering about a 401(k) versus pensions? Here’s the deal: Pensions aren’t all bad. If you have a company pension waiting for you when you retire, that’s great! But it shouldn’t be your only source of retirement income. Just like you shouldn’t count on the government for Social Security, you shouldn’t count on someone else to save for your retirement for you either.
Historically, pension plans were a great idea—especially as a way to keep employees motivated to stay loyal to their employer. These days, most people don’t spend most of their career with the same company, making the idea of a pension less appealing (and more of a headache when you have to track them down later on).
With 401(k) plans, you have total control over your money, how your funds are invested, and what your golden years will actually look like. There’s no cap on how much you can save. But unlike a pension, 401(k) payouts aren’t guaranteed. Just like with your bank account, there’s only money in there if you put money in.
Before we move on, let’s talk about what happens to your money when you die. With a 401(k), your assets can be passed down to your heirs and family members. But with a pension plan, your funds essentially stop with you. Your surviving spouse will receive your funds each month but at a lesser amount.
Should I Cash Out My Pension?
Wondering if you should cash out your pension in a lump sum? If your company declared bankruptcy, you changed jobs, you’re going into early retirement, or you just want more control over your own retirement savings with a 401(k), cashing out your pension with a lump sum is a great option for you.
As you know, once a person reaches retirement, they’re offered monthly pension payments—for the rest of their lifetime. But if you die, your spouse (and the rest of your family) will be left without that consistent income. That’s why we recommend taking the lump sum instead of the “guaranteed” lifelong payments—because our lives aren’t really guaranteed. And if you want to leave behind a financial legacy to your kids and grandkids, a pension plan won’t help.
Here’s the downside: If you cash it out before you’re eligible, you’ll pay quite a bit in taxes. So if you don’t need the money right now, your best option is to roll those funds into an individual retirement account (IRA). With that option, you won’t pay taxes on it. And if there’s a reason you need to get to that money, you can pull it out.
Dave Ramsey recommends investing into an IRA that has good growth stock mutual funds with “long, boring track records.” You’ll want to look for four different types: growth, growth and income, aggressive growth, and international.
But listen: You don’t have to make these decisions alone. Ramsey SmartVestors will help you make an investment plan you’re confident in. So if you’re looking for pension advice or guidance on your investments and getting your finances in order for retirement, we can help. SmartVestor is a free service that will connect you with professionals you can trust—in your area.
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This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.