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How Does A Retirement Savings Account Compare To Pension Plan?
How does a retirement savings account compare to a pension plan? Retirement planning can be a big, looming cloud of complex questions, like the difference between retirement savings accounts and traditional pension plans. While there are many different ways to add to your retirement piggy bank, retirement savings accounts (or IRAs) and pension funds are common. The differences between the two are vast. One is entirely based on the employer; one is entirely controlled by the employee. One is a set plan put in place with years of commitment; one is a flexible account with few liabilities.
First, you need some information on pension plans.
Pensions are generally set up by large corporations and government entities as a means of retaining quality employees. Once employed, you start to work towards the goal of a pension, like a promise from your employers that they will reward you for a life’s work with them. Generally, pensions are set up based on years of work for the company (usually anywhere from 20 to 40 years). Then, the employee can retire and keep all benefits and pay for the rest of their lives.
- Once you retire, your paychecks will keep coming, sometimes at the same rate as your highest pay before leaving the company, sometimes less. You also keep your medical insurance and life insurance coverage. The benefit of pension plans is that they are a constant; there’s little risk involved (besides a slimy employer). However, to get a fully-vested pension package, the employee has to stay with the company for the long term, something that is becoming more and more rare in recent years.
Retirement savings accounts have their own pros and cons.
- A retirement savings account, sometimes called an IRA, is like a special savings account. Anyone can have one and since they are in the employee’s name, they move with you from job to job. In an IRA account, money that’s invested is traded on the market, often according to the account holder’s preference: aggressive, moderate or conservative. Aggressive trading has the highest rewards, but also the highest risk of loss. Conservative trading has little risk of loss, but doesn’t stand to gain extremely high rewards. Moderate trading is a middle ground between the two.
- The benefits of an IRA account are not only that you take it with you from one job to the next. When the time comes to take money out, it is tax-free, so whatever money is in your account is yours to keep without an additional income tax. Also, account holders stand to gain over the long term.
- The risk with retirement savings accounts is obviously that you stand to lose should the market crash terribly. Although it is highly unlikely, some people do lose money in their accounts with aggressive trading.
Posted on: Jun. 06, 2010