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Are Pension Plans Worth The Hassle?

by Muzammil Bashir
(United Kingdom)

The worst thing you can do after working a lifetime of jobs is to get to retirement age and have no source of cash flow or assets needed to maintain a healthy and enjoyable lifestyle. Some of the saddest sights are seeing hard-working senior citizens working menial, low-paying employment not because they want to stay active and be connected with society, but because they absolutely need those meager wages in order to survive. It should be a requirement for all young people just starting off in the workforce to get educated regarding the necessity to plan for retirement, right from the beginning of their working career.

Young people have the power of time and compound interest on their side, and wise financial habits started now can result in a secure and wealthy retirement. The benefits of utilizing pensions, as well as other forms of retirement planning, should be emphasized to everyone receiving a pay check. A little hassle and effort put in at the beginning of the journey will maximize the chances of finding the financial "treasure chest" toward the end of your working life.

What Are Pension Plans

Pensions are retirement plans established by employers or government agencies in order to guarantee financial compensation once you have reached an age where you are no longer required to work. The pension will pay out a pre-determined amount of funds on a monthly or annual basis for a specific period of time, depending on the terms of the contract.

The most common plans are called "occupational" pension plans or retirement plans and are created and maintained by the employer. In this kind of pension plan, both the employer and employee make contributions to the fund while being gainfully employed, with benefits to commence distribution upon reaching retirement. Contributions for the pension funds are typically withdrawn automatically from your pay check for convenience.

Types of Pension Plans

Pension plans can either be considered "defined benefit" or "defined contribution" by how the specific monetary pay-out amounts are decided upon.

1. Defined Benefit Pension Plans

When dealing with pensions that are defined benefit plans, a formula is used in combination with your salary and amount of years being employed, to come up with a specific monthly pay-out to be distributed each month. These plans have been getting phased out by most employers, who now choose to go with defined contribution plans instead.

2. Defined Contribution Pension Plans

With defined contribution plans, the amount of the monthly payout is determined by the amount of funds contributed and the performance of the investment components being used like stocks and bonds.

The Benefits Of Pension Plans

1. Smart way to fund retirement

Regardless of the age that you plan on retiring, you need to have a plan of how you will be getting income in order to support yourself. Some seniors enjoy the attributes associated with working, and continue to work as long as they physically can. At some point, however, you are going to want enjoy other aspects of life, and will need a way to financially subsist. Pensions are attractive because in most instances, employers will match all or some of the contributions that you are making. This means an instant return on your investment. You should contribute as much as you can in order to take maximum advantage of this investing opportunity.

2. Tax-deferred growth

Another attraction of pension plans is the ability to accumulate wealth without having to deal with taxes until the money begins to be withdrawn. In some cases you are even allowed to contribute pre-tax earnings into the retirement funds, giving further tax benefits by lowering the amount of earned income that you need to report.

3. Compensation to survivorís

One feature included in pension plans that you may also be interested in is the option of transferring the plan in the unfortunate event of your untimely passing. If you were to die before or while receiving pension payments, your spouse or children may still be able to get access to the much needed compensation.

Pension plans of any sort can give you the confidence of knowing that all or a portion of the money needed for living expenses in retirement years will be taken care of. With pension plans, once everything is all set up, and the percentage of income you are withholding starts to get taken out automatically, you will adjust in a very short time. You won't even miss or even think about those funds after a few pay checks. While in the meantime, every dollar you are contributing is likely getting matched or partially matched by your employer and is growing tax-deferred, fueled on by the power of compounding interest.

My name is Muzammil Bashir. Iím the Senior Editor of pensioncalculator.org Ė The online pensionís resource where you can use our pension and annuity calculator and find out about pension release.

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