Pensions vs. Retirement Benefits: Understanding the Key Differences

In order to enjoy your golden years, retirement planning is a must. Part of that planning is understanding the difference between pension and retirement benefits. Employers usually offer one or the other.

Pension Benefits

When referring to pension benefits, employers and financial planners mean a defined benefit plan. With a defined benefit plan, you receive a payment from your employer upon your retirement. The monetary benefit depends on your average salary and years of service to the company. The plan is completely funded by your employer.

Receiving Pension Benefits

There are two types of payouts you can receive from a defined benefit plan. The first is a lump sum payment in which you receive all the funds to which you're entitled. Some retirees prefer a lump sum so that they can invest the money as they want. The other way to receive pension benefits is through a monthly payment. This type of payout provides fixed monthly income and makes budgeting easier.

Retirement Benefits

A defined contribution plan is typically referred to as a retirement benefit. With this type of plan, you contribute to part or all of your retirement fund. Your employer may choose to contribute as well as part of your employment benefit package.

Retirement Plan Types

There are a variety of defined contribution plans that you can set up to save for retirement. The 401k and IRAs are the most popular. A 401k plan is offered by your employer, while a traditional and Roth IRA are set up solely by you.

401k Benefits

Normally, you can save more money for retirement when investing in a 401k plan than you can with an IRA. Additionally, many employers offer a matching fund benefit to encourage employees to save. If your company offers this, it's wise to take full advantage of it. Also, your contributions to your 401k are tax deductible.