Employer Pension Plans
Before I get into the mechanics of how you go about saving money for retirement, I should say that there is one wildcard here (your employer’s pension plan). I think you can probably rely on your employer’s pension plan. And it just may be the your employer’s pension plan will provide you with all the retirement income you need. But you need to be careful.
One factor that you need to worry about a little is whether you retirement income benefits depend on your continued employment. Let me explain. One kind of retirement plan, called a defined-benefit plans, the easy retirement income based on your salary in the final year or years you worked. With this type of plan, for example, you might receive a pension benefit of $32,000 if you work 40 years for a big company and make $40,000 in your final year.
A defined-benefit plans such as the one I just described can be a great deal for employees. In fact, if your employer has a plan like this and you can be sure of someday receiving the benefits, you probably don’t need to save a time for retirement. No kidding. But there is a problem with defined-benefit plans if instead of working for one employer for many years, you work for a number of different employers. This is true even if all the employers have the same 2% for every year you worked benefit formula.
The problem is that the future of which you retirement income is based (to seize your final years or years salary) will be very low for all but your last employer or two. Inflation causes this, of course, and so does the fact that people tend to make less in their early working years. To see how this works, suppose that you worked someplace for 40 years, the you’re making $40,000 a year in your final years, and that you receive a retirement benefit equal to 2% of your final salary for every year you worked. In this case, for your first 10 years of work you would get $8,000 of retirement income (10 times 2% times $40,000). This would be true even though you were probably making far less at that time.
Now consider the case of your neighbor. Let us say she had for different jobs over her working years. Let’s just say her first job, the one she worked during the first 10 years of her career, paid last because it was a less demanding job. And, of course, 30 years of inflation have passed since you left a job. So maybe are sorry at the 10-year marker was $7,000. In this case, for her first 10 years of work should get a retirement benefit from that employer of $1400 (10 multiply by 2% multiplied by 40,000).
Do you see the scary part of this? You, for your first 10 years of work, accumulate $8,000 a retirement income, but your neighbor, for her first 10 years of work, accumulates $1400. Your neighbor situation is even worse if she switched jobs more frequently (for example, every couple of years or so. If that was the case, because of the way that pension benefit calculations work it’s possible for your neighbor to have no retirement benefits at all for her first 10 years of work
What I have just described is a problem with defined-benefit retirement programs. They can be wonderful deals for long-term employees, but for people who switched jobs frequently (and that is a mass majority of us now), they don’t amount to such a good deal. Please note, too, that even if you have the best of intentions about staying someplace for your entire career, you can’t really be sure you’ll do this. Companies downsize. Industries decline. Economies collapsed. Presidents screw up. What you want to do with your life may change.
One Last Comment Regarding Defined Contribution Plans
Defined contribution plans or the other basic retirement income plan. With a defined Dr. be should plan, your employer contributes money to your account. A defined contribution plan is a better deal for people who change employers, as long as they get to keep the money the employer contributes.
Disclaimer: The views expressed by this author don't necessarily reflect the opinions of Lazerloan.com, it's owners, or it's affliates.
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