When it comes to retirement plans, you typically have one of two options: a traditional 401k or a pension plan. There are a few similarities between these two retirement funds. Pensions and 401ks both will provide you with monthly funds to support yourself after retirement. The distinctive difference lies in the source of these monthly payments: a 401k is built by contributions that come from your paycheck. A pension plan is funded by your employer.
The Precious Pension Plan
These days, the traditional pension plan is a rarity. While they are nearly extinct among most industries, pensions are still common in some fields, such as the military and automobile industries. Even so, new employees may not have a pension offered to them at all. Many employers have backed away from these once-abundant retirement plans because the cost is completely shouldered by the employer, rather than contributions from your salary.
The size of your pension is dependent on age upon retirement, years worked, and your salary. You receive a fixed amount every month, and your employer is responsible for providing your payments, even in times of financial hardship.
Advantages of a 401k
If you were hired within the last 20 years, you probably have a 401k retirement fund. 401ks are a popular choice for employers, as it saves them money. As mentioned earlier, a 401k is comprised of employee contributions taken from his or her salary. Although this plan seems to pale in comparison to a pension, there are some pros to the 401k. Contributions come from your paycheck before taxes are taken out. In fact, you don’t have to pay any taxes on a 401k until you reach retirement age (59 ½ years old) and can make withdrawals.
Even though you have to put money into your 401k, your employer typically matches your contributions. This doesn’t mean you can put away half of your salary and expect your employer to put in the same amount. First of all, there are limits to how much an employee can contribute per year; as of 2015, the limit is $18,000. In addition to limits imposed on your contributions, the employer will match only a certain percentage of your contributions. Employer contributions typically don’t exceed 6% of your annual salary, and while some will match the entirety of your contributions, most will match half.
Pensions VS 401k: We Have a Winner
All signs point to the pension as the best retirement fund. However, it really depends on you. While a pension offers stability, 401k can be invested in stocks and bonds so you can grow your retirement. It can also be rolled over into an IRA if you change jobs, while pensions are best for those who stay with a single company for the duration of their career.
