While pension plans used to be much more common, today, many employees change jobs multiple times throughout their careers. With this cultural change, so too has come a major change in pension plans: most employers no longer offer them. That being said, if you are one of the lucky ones whose employer does offer a pension plan, you may be wondering what a pension plan is and whether or not contributions from your pension plan will be enough to support you during retirement. Here’s what you should know—
What Is a Pension Plan?
A pension plan refers to an employer-sponsored retirement savings plan. When an employer offers a pension plan, the employer will add a sum of money to the plan over the course of the employee’s career. (Note: this is different from a defined contribution plan in which the employee, not the employer, makes contributions.) When the employee retires, the individual will be able to withdraw periodic payments for life. While this is great, will these payments be enough to support a person during retirement?
Will a Pension Plan Be Enough?
Most pension plan benefit amounts are based on the person’s working salary and the number of years worked. Most pension plans will pay out somewhere around 70-75 percent of a person’s pre-retirement salary. Not only is this not a given (it could be lower!), but experts also estimate that most individuals require about 80 percent of their pre-retirement income during retirement. As such, a pension plan works better when used in the context of a more detailed retirement plan.
In addition to a pension plan, you should consider other retirement savings options. Your employer may offer a defined contribution plan, such as a 401k. If your employer does not offer a defined contribution plan, you should consider opening an Individual Retirement Account (IRA).
Create a Retirement Plan with Help from an Expert
Planning for retirement is one of the most important things you’ll ever do. When you decide to stop working, having a solid retirement plan in place—and plenty of savings to support yourself—will be essential. We know that planning for retirement can be complicated. Whether you have a pension plan or not, our retirement planning professionals at Harvest Financial Planning, LLC can help. We’ll review your financial situation, your income, and your expected costs during retirement to help you create a savings plan that makes sense for you. To learn more about retirement planning and how your pension plan may interact with your overall retirement plan, call us directly today.