A comfortable retirement should include a traditional pension plan or a 401(k) or similar account and Social Security. Please be aware while pensions and 401(k) provide money in retirement, they are very different.
Here is a short review to understand the basics of each account, including the benefits, disadvantages, and differences between a pension plan vs. a 401(k).
An old-fashioned pension gives you and or a partner a source of stable and predictable lifetime income in retirement, so you do not have to worry about depleting assets. Pensions take the guesswork out of retirement planning.” The company funds pensions, and sadly they are declining in availability. High costs, market worries, and the promise to pay the retired worker or partner for life have become expensive promises. Companies that have dropped pensions are replacing them with 401(k)s, shifting all the costs and responsibility of saving for retirement to workers.
Having a 401(k), all the responsibility to manage risks is on you. If you don’t save enough, withdraw too much, or your investment choices drop, your retirement fund could run out of money. Even a well-funded 401(k) offers no guarantees. While you can estimate what you may have in retirement based on previous market returns, there is no guarantee you’ll grow your retirement savings at a planned rate. This can make planning for retirement spending very difficult.
401(k) plans allow you to invest your money but only between investments your employer authorizes, and you do not have access to any investment you want. However, with a 401(k), if investments fail to perform as expected, it directly impacts your nest egg. It’s a flawed system that expects an average person to become a savings and investing expert.
A Roth 401(K) may be wise if your company offers it. The tax benefits will be appreciated when taxes rates rise. The massive national debt and the need to continue meeting its financial obligations will cause taxes to increase.
Summary: Pension & 401(k) plans can be summed up as follows:
- Employers primarily fund pensions, while 401(k) plans are primarily funded by employees.
- Employers control pension investments, while employees partially control 401(k) assets. Pensions offer a guaranteed income for life, while 401(k) provides unknown payments
- that may be depleted depending on an individual’s decisions.
- 401(k) plans are portable employer to employer. Pensions stay at the company till retirement age.
All is not lost if your employer only offers a 401(k) plan. There are a few IRS-approved strategies to make the 401(k) more pension-like and provide some guarantees. Please reach out and see if any of the ideas are available to you.
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