vest
/vest/
verb
To give or bestow the right to a present or future benefit, in this case, a pension.
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Not all that long ago, many large companies offered pension plans as part of their typical employment package. Only 13 Fortune 500 companies carry on that tradition today, shifting retirement planning responsibilities to employees through accounts like 401(k)s. While the goal is the same for pension plans and 401(k)s, you should know the key differences in how they’re managed and paid out.
Pension plans and 401(k)s differ in many ways, including who funds and manages the account and how it’s paid out at retirement.
Pension — defined benefit plan | 401(k) — defined contribution plan | |
---|---|---|
Payout at retirement | Guaranteed lump sum or monthly payments | Withdraw funds at age 59.5 or older |
Who funds the account | Employer | Employee with some employers matching contributions |
Who manages investments | Employer | Employee |
Payout length | Lump sum or monthly payment for life, with option for spouse to continue collecting pension after you die | Lump sum or minimum total withdrawn as needed each year until balance is $0 |
A pension is a defined benefit plan that’s funded by your employer and guarantees payments after you retire. How much you’re paid out at retirement comes down to a formula that considers your age, salary and years working for the employer. Payout options include a cash lump sum, a deposit into an individual retirement account (IRA) or a monthly payment for the rest of your life.
Pensions offer peace of mind that no matter how the market performs, you receive income for life. Though to earn full pension benefits, you must stay with your employer for a specified period of time. While pension plans are not as common today among the private sector, more than 5,000 public retirement pension systems are paid into by government employees.
/vest/
verb
To give or bestow the right to a present or future benefit, in this case, a pension.
A 401(k) is a defined contribution retirement plan that’s funded by employees. Those who are self-employed can set up their own 401(k). The way this plan works is you choose a percentage of your salary to contribute to your 401(k) up to a maximum $20,500 in 2022. Many employers offer to match an employee’s contribution, but the amount varies by employer. Some employers, for example, may offer a dollar-for-dollar match up to 3% of your salary. If your salary is $70,000 and you contribute $2,100 — 3% of your income — your employer will match the exact amount, raising your 401(k) contributions to $4,200.
These plans offer the ability to take your accumulated balance with you through either rolling over your funds to another account or withdrawing your funds for a fee. You can also borrow from your 401(k) up to the lesser of 50% of your vested balance or $50,000. Ultimately, your payout at retirement depends on your investment choices along the way.
Finder tip: If your employer offers to match your 401(k) contribution, leverage the match by socking away the most that you’re able to maximize your retirement savings.
Pension plans and 401(k)s differ in many ways, including who funds and manages the account and how it’s paid out at retirement.
Pension — defined benefit plan | 401(k) — defined contribution plan | |
---|---|---|
Payout at retirement | Guaranteed lump sum or monthly payments | Starting at age 59.5 or older, withdraw what you’ve saved and any investment earnings |
Who funds the account | Employer | Employee with some employers matching some contributions |
Who manages risk | Employer | Employee |
Who manages investments | Employer | Employee |
Payout length | Lump sum or monthly payment for life, with option for spouse to continue collecting pension after you die | Lump sum or minimum total withdrawn as needed each year until balance is $0 |
Pension and 401(k) accounts aren’t the only ways to save for retirement, including individual retirement accounts (IRAs). Compare top brokers to find a retirement account that works for your financial goals.
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Pension plans and 401(k) can both help you save for retirement, but each gets you to your goals differently. Pensions are fully employer-funded, while 401(k)s accumulate balances from a percentage of your paycheck, with some employers matching what you contribute. And how you’re paid out at retirement differs as well.
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