If you work to make a living you should understand at some point in your life you may no longer be able to work. This can occur as a result of the natural aging process or even with a type of medical issue. While you are still able to work and earn money you will want to do what it takes to make sure you are ready to retire in the future when the time comes. One way of doing this is through taking advantage of a defined-benefit plan provided by your employer.
Defined-benefit plan basics
When you are enrolled with a defined-benefit plan with your employer you are legally guaranteed by the employer to receive a certain number of financial benefits upon retirement from the company. This can come in the form of annuity payments for life or a lump-sum payout, depending upon the terms set forth by the defined-benefit retirement plan. The amount of benefit you receive will be determined by a preset formula based upon particular metrics, such as your salary and how long you have worked for your employer.
Your employer will be responsible for investing the funds of the retirement plan. Usually, an employer will hire a third-party investment firm with the professional experience and knowledge necessary to manage the funds and make appropriate investment decisions.
Generally, with a defined-benefit plan, you are not allowed to take out the funds whenever you want like is possible with a 401(k) plan.
How defined-benefit plans work
Defined-benefit plans are also known as pensions or qualified-benefit plans. This type of retirement plan is different from other types of plans such as retirement savings accounts because the payout you receive does not depend on the results of the investment decisions made by your employer. Therefore, even if investments made with the plan’s funds sour, your employer is still legally obligated to payout your defined amount of benefits. Essentially, your employer is assuming all of the investment risk.
Usually, an employer will fund a defined-benefit plan by contributing a portion of your pay as an employee into a tax-deferred account. Some plans also allow you as an employee to make additional contributions. Essentially, the contributions to the defined-benefit plan are deferred compensation for your work as an employee.
Payout options
Most defined-benefit plans provide you with two options for payout: a lifetime annuity or a single lump-sum payment. The annuity will provide you with a consistent income stream in the form of monthly payments until you pass away. If your plan includes an option for a qualified joint and survivor annuity, your spouse will be able to continue receiving monthly benefits even after your death. The lump-sum option will pay out the total value of the retirement plan in one single payment.
Working beyond retirement age
Although you may have reached the age where you are allowed to start receiving payments from your defined-benefit plan provided by your employer, you may also want to consider continuing to work for a bit longer. This can help increase the amount of your payout since the length of time worked is more. Also, it could increase your final salary that is used to calculate the benefits you will receive. Additionally, the plan may stipulate working past the normal retirement age automatically increases your benefits.
Is a defined-benefit plan enough for retirement?
Whether your employer’s defined-benefit plan provides enough financial security for retirement will depend on the specific rules of the plan which ultimately determines your payout. It may be possible you need additional retirement accounts and investments to supplement your pension. Speaking to a financial advisor can help you figure out what you need to do to maintain your desired quality of life during retirement