How Pension Plans and 401(k) Plans Differ
None of us can stay young forever – but no one should have to work for an entire lifetime. It is essential to familiarize yourself with your employer-sponsored retirement plans and the benefits they offer so you are well-prepared for the future. These two types of retirement plans can play a significant role in your life when you retire, so it is essential to plan effectively and fully understand how to make the most of them and maximize their benefits. There are also some key differences between these two plans, so keep reading to learn what they are.
The Key Differences Between a 401(k) and a Pension Plan
Although it is employee-sponsored, your 401(k) plan is a retirement plan you contribute to. In some cases, an employer may make contributions to your 401(k) plan as well. The money you and your employer contribute gets placed in a variety of investments, such as stocks, bonds, mutual funds, annuities, and other securities.
The growth your plan accumulates is tax-free. You will not have a cap on the growth of your account. However, there are some risks associated with 401(k) plans, and the investments you make have no guarantees. That is why it is crucial to choose your investments wisely.
With pension plans, on the other hand, employees do not control investment choices, nor do they have to bear any investment risks. Contributions are made by your employer to an investment portfolio, which an investment professional manages. When you retire, you will receive a monthly income that is paid out by your pension plan for life. The amount you receive is determined by the number of years you worked, your average salary for the past three to five years of your employment, and a percentage multiplier. To receive the full amount, the pension must be vested. Generally, this can happen in about five years. Moreover, private pensions are insured, which means your pension is likely protected.
Which Retirement Savings Plan is Right for You?
Both plans present great benefits. Your 401(k) plan is more portable, and when skillfully managed, you can see incredible growth. That said, it is essential to remember that if you take any money from your 401(k) before retirement, you will pay a 10% early withdrawal fee. While not under your control, your pension is guaranteed income for life once you retire. Thankfully, when employers provide both of these options, employees do not have to choose. You can have a 401(k) and a pension at the same time if they are both part of your employer’s benefits package. Many employers only offer a 401(k) plan.
Connect with Us to Learn More About Your Retirement Plans
Planning for the future is important, so if your employer provides a 401(k) plan, a pension plan, or both, it is important to fully understand them and know how to make the most of them. Managing your retirement assets can help ensure that, even after you leave the workforce, you can continue to easily manage your life.