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What If My Job Offers a Pension?

How Should I Plan for Retirement If I Qualify for a Pension Plan?


It can be difficult to find very much information on pension plans, because many employers have stopped offering them. A pension plan is a type of retirement plan set up by your employer. The terms of the pension plan will depend on the plan, and will outline if you must make contributions to qualify. You also must become vested in your pension plan, and the number of years of service will affect the amount you paid out overtime.

Generally, the only places still offering pension plans are schools and government departments. If you work for the state or city government, you may qualify for a pension plan through your employer. You may also qualify if you are a teacher, a firefighter or a police officer. Often contribution to the pension plan is mandatory at a set rate. This means you will contribute to the pension plan whether you want to or not.

If you hare eligible for a pension plan, you need to look at a few things. First, you need to understand the amount that you will be paid when you retire. This is often a complex formula that looks at your years of service, your average salary over the last five years, and whether or not you want to set it up so your spouse will continue to get paid by the pension after you pass way. You will also need to look at the retirement age on the pension plan. Some plans require both a minimum retirement age and minimum number of years of service. Other plans allow you to retire after you have maxed out a certain number of years of service, usually twenty or thirty years. After you have determined each of those factors, you will need to decide how much you will want to receive to live on when you are retired.

You will need to set up other investments to cover the difference in the amount you will need to retire comfortably. This means you will likely max out your IRA contributions each year. If you are the only spouse working, you can take advantage of a spousal IRA in order to increase the amount you contribute in a retirement account with tax benefits. Your ultimate goal should be to set aside about fifteen percent of your income each year towards retirement accounts. If you max out your options, you may want to set aside an investment account for retirement, even if it is not getting the same tax benefits as an IRA or other retirement account.

Some employers will allow you to invest in a 401(k) or 403(b) plan in addition to the pension plan. You will need to review the terms and conditions of the investments with your human resources representative to makes sure you are not forfeiting other benefits by choosing to participate in the 401(k). The rules really depend on the employers. Some will pull you out of the pension plan if you choose the 401(k) option, while others will allow you to invest in both plans.

If you have a choice between a pension plan and a 401(k) plan, you need to look at how long you plan on working for the employer and the matching rates for each plan. Often pension plans will have the employee contributing more towards your pension than a match. However, the pension amounts will be much lower if you are not going to be with the employer for very long. Teachers usually stay with the same school district or teach within the same state, which means it makes sense to stay with the plan. But if you work in another field, you may be moving on before you retire, which makes the portability of the 401(k) a better option.

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