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Defined Benefit Plan

“For our parents and grandparents, planning for retirement was fairly simple. If they faithfully worked for a decent employer for many years, in addition to receiving a gold watch, they were taken care of via a company pension. The pension was ‘on the house’ so to speak.”

- Nancy Lloyd, author of
Simple Money Solutions

Back in the days of World War II, the definition of a good job was one that offered pension benefits. Not anymore. Today, a good job means stock options and an HMO.

Retirement plans have changed a great deal in the past two decades, but there are still some companies that offer pensions, also known as defined benefit plans. With a defined benefit plan, the employer imposes a predetermined formula to calculate the exact benefit an employee will receive upon retirement. This is usually based on salary and number of years of service.

It is the company's responsibility to invest the pension money wisely so that it will someday pay a retiree a monthly check for life. However, it is up to the employee to check the status of the health of the pension. Upon request, a company is required to provide workers with the amount of money they have accumulated in their pension account.

Check with the Pension Benefit Guaranty Corp at www.pbgc.gov for your rights. The PBGC requires most plan administrators to send a notice to workers if the pension's funding level remains below 90%.

Some employers have instituted a new type of pension plan, called a “cash balance” plan. With this plan, the employer is allowed to contribute a certain percentage of the employee’s salary into an account earmarked for that employee. The employee does not contribute to the account nor does he or she direct where it is invested. These accounts are typically invested conservatively and only earn a small amount of interest.

 Defined Benefit Plan

 Defined Contribution Plan

 IRA

 

 Annuity

 

 

 

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