18 Jun Defined Benefit Vs. Defined Contribution

Retirement, the golden years, the time one gets to spend with their family, friends and loved ones. The last thing someone wants to worry about during this time is money. But that’s why you’re prepared, right? Well you may not be as prepared as you think. Retirement plans aren’t as simple as they used to be. Work for one company, put money away, retire, and have a steady income for the rest of your life. However the number of private pensions in the United States is at an all-time low. The trend is to move away from Defined Benefit to Defined Contribution plans. At their peak Defined Benefit plans numbered 175,000 in 1983 and just 25,000 in 2013 (according to USAA 2012) and social security may not be enough for the average person. It might be time to rethink your plan. But first it’s important to understand exactly what options you have for your retirement to know which one is right for you.

Overall there are two different types of retirement plans, Defined Benefit and Defined Contribution. Let’s start with the Defined Benefit plan. Defined Benefit plans can be broken down between pensions, federal, state, and private alike, and social security.They are called defined benefit plans because the amount of money (benefit) that you receive, at retirement is a defined; a set amount of money for the rest of your life. The amount you receive is dependent completely on the company or employer who is giving you this plan, the amount of time you’ve been employed by said company, and your salary. There isn’t much control over how much more or less you can make throughout your retirement. For most long term or government employees these are great options considering the fact that many employers are very generous to their retirees using these plans giving them enough money to live comfortably for the rest of their retirement considering they don’t spend past the original calculated amount set up for the defined benefit plan.

However this poses the question, what if that isn’t enough? Those who are concerned with this same question usually turn to Defined Contribution Plans. The main difference between these two plans is that in a Defined Benefit plan you are calculated the amount of money that you will receive for the rest of your retirement while a Defined Contribution plan specifies the amount of money that you put into the retirement plan yourself. There are different types of defined contribution plans such as 401k, 457, 403a, 403b, and others. There are multiple advantages that this method of retirement saving has over the Defined Benefit plan. The first of these is control. In Defined Contribution plans there is control over which investments you’re putting your money in and how risky or safe you want to be with the money that you put into your fund. This also gives you a higher potential for the amount of money that you can have in your retirement. Because you get to choose how much money you put in and to what investments you place your money into, you have more than just control over how much money you will make in retirement. Another question one might have is, what if I switch employers? This is a very valid question. Although a Defined Benefit plan is portable it requires the Benefit plan to be recalculated to fit the standards of that new employers plan, and that’s only counting if that employer offers a defined benefit plan. For the most part, it is almost impossible to transfer these to a new employer. While with a Defined Contribution plan is highly portable between employers. You can do a direct transfer from one 401k to another. Once you leave you can roll your funds into an IRA where you control the asset investments. Also considering that you are the one putting the money into the fund you are able to gain access to it sooner.

Overall both of these are different plans for different people in different situations. A Defined Benefit plan may work well with your occupation and lifestyle. But for those who are not offered one of these by their occupation have good reason to be concerned that their social security alone may not be enough to get them through retirement the way they had planned. For those who are concerned with this a Defined Contribution plan may be right for you.

 

If you’ve ever asked these questions:

1. Will I have enough income at retirement?
2. Will I run out of money?
3. How much money will I need to retire?
4. How much can I get if I retire at (age…)?

Contact us at (800) 584-1902 or email at gregw@ortizworldwealth.com