A pension is a form of retirement plan that provides monthly income to employees of companies or governments that offer such plans. The company contributes money to the pension plan while you are working. A formula determines how much money the pension will provide to you once you are retired.
The formula a pension uses is based on a combination of the following:
- Your years of service with the company offering the pension
- Your age
- Your compensation
For example, a pension plan might offer a monthly retirement benefit that replaces 50% of your compensation (as measured by taking an average of your pay over your last three years of service) if you are age 55 and have at least 10 years of service. If you are 65 and have 30 years of service the pension might provide a retirement benefit that replaces 85% of your compensation.
Pension plans are also referred to as defined benefit plans, as the plan is designed in a way to tell the company what they must put away to provide you a defined future benefit amount. The United States Department of Labor Offer Frequently Asked Questions About Defined Benefit Plans.
What if My Company Doesn’t Offer a Pension?
Many companies have stopped offering pension plans. This means the burden of saving for your retirement falls on you. You must figure out how to save enough to create your own pension plan.
The advantage of a pension plan is it provides guaranteed income. Most pension plans have been replaced by 401k plans which offer a variety of investment choices. Most 401k plans however do not offer a way to invest in something that provides guaranteed income. You'll need to find your own way to save and invest to create guaranteed income for your retirement.
To create your own future retirement income you’ll need to do several things:
- Learn how to invest appropriately in your 401k plan if your company offers one
- Fund IRA accounts to the maximum amount each year
- Learn how to create your own future sources of guaranteed income
Next: One other option is to figure out how to get a pension by finding an employer that offers one.