Pension / Retirement Plan
A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement.
What is Pension / Retirement Plan?
The biggest difference between a 401(k) plan and a traditional pension plan is the distinction between a defined benefit plan and a defined contribution plan. Defined benefit plans, such as pensions, guarantee a given amount of monthly income in retirement and place the investment risk on the plan provider. In addition to an employer's required contributions, some pension plans have a voluntary investment component. A pension plan may allow a worker to contribute part of his current income from wages into an investment plan to help fund retirement. The employer may also match a portion of the worker’s annual contributions, up to a specific percentage or dollar amount.
Types of Retirement Plans:
Why Pension / Retirement Plan is Important?
Increase in Life Expectancy
Our generation will live longer than previous ones due to improved medical and healthcare, implying the need to gather enough funds that can sustain longer life. This also implies that the healthcare needs and expenses are likely to haunt us.
Shortfall in Employer Funded Pension/Pension Funds
The employer or government funded pension schemes are less likely to sustain the income needs post retirement. The pension that one may receive from these schemes will not be sufficient to maintain the lifestyle. This is the reason many individuals worldwide supplement their state or employer funded retirement plans with self-funding- i.e. pension plans.
Desire to Remain Contributor
They want to contribute to the family by providing and supporting the kids or grand kids at milestones of their life remains even after retirement is inevitable. Starting an independent venture is also an emerging trend. These can be fulfilled only when one is financially self-reliant.
Rest and Relaxation
After fulfilling all your responsibilities, you may want to build a retirement corpus to go on holidays, to pursue a hobby etc.
Factors Influencing Retirement Plans:
Investment Risk
Investment or market risk is the risk that fluctuations in the securities market may result in the reduction and/or depletion of the value of your retirement savings. If you need to withdraw from your investments to supplement your retirement income, two important factors in determining how long your investments will last are the amount of the withdrawals you take and the growth and/or earnings your investments experience.
Inflation Risk
Inflation is the risk that the purchasing power of a dollar will decline over time, due to the rising cost of goods and services. If inflation runs at its historical long term average of about 3%, the purchasing power of a given sum of money will be cut in half in 23 years. If it jumps to 4%, the purchasing power is cut in half in 18 years.
Long-Term Care Expenses
Long-term care may be needed when physical or mental disabilities impair your capacity to perform everyday basic tasks. As life expectancies increase, so does the potential need for long-term care.
The Costs of Catastrophic Care
As the number of employers providing retirement health-care benefits dwindles and the cost of medical care continues to spiral upward, planning for catastrophic health-care costs in retirement is becoming more important. If you recently retired from a job that provided health insurance, you may not fully appreciate how much health care really costs.