Over the past several decades, public and private employers have shifted their retirement benefits from an emphasis on pensions (otherwise known as “defined benefit” plans) to focusing on “defined contribution” plans such as 401(k) and 403(b) plans. However, employees of some large corporations as well as public employees (e.g. first responders, teachers, government workers) are still entitled to pension income in retirement, and many public employees are required to pay into a pension plan from their paychecks each month. This trend away from pensions— including the option for some retirees to receive a lump sum payout in lieu of their pensions—seems motivated predominantly by a desire to reduce risk and liabilities for the employer, but it may have benefits for the employee as well. We discuss the pros and cons of pensions in Part 1 of this article (below), and we will discuss the prospects for employees expecting to receive pension income in retirement in Part 2.
Pros. The obvious benefit of a pension is the steady stream of income for retirees (and potentially their spouses) for their entire lives. It protects against longevity risk— the chance that you live longer than expected and outlive your assets. It also insulates you from market fluctuations, since the pension benefit is determined by factors external to the market (usually your salary and years of service) and the pension frees you from relying on investments for all of your retirement income. These are significant benefits and often provide comfort for pension recipients, since they are less dependent on their investment portfolio as compared with those whose only source of income in retirement is Social Security.
Cons. As compared with saving (and potentially receiving an employer match) to a 401(k) or 403(b), however, there are some drawbacks to participating in a pension plan.
Thus, while the promise of pension income does tend to give retirees a sense of security as they enter retirement, there are some drawbacks to that asset as compared with retirement plan savings. If you are eligible for a pension and face pension-related decisions, please contact us so that we can help you weigh the pros and cons for your specific circumstances.
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