Whether you are looking forward to retirement or dreading your final day of work we all hope to be prepared for the day when it arrives. With the current economy retirement planning has never been more important. There are many different paths to choose when it comes to planning for retirement, the key is to pick the type of retirement you feel is most appropriate for you personally.
What if a company you were wanting to work for offered a particular type of retirement program. Would this have any affect onÂ your decision to take a job with this company?
Two popular choices among many companies are defined benefit or a defined contribution plan. Both of these plans are still in use today by employers. If you were given the option which would you prefer?
A defined benefit plan (DB) is like aÂ traditional pension or fixed pension.Â Usually, the employee is guaranteed for the rest of their life and sometimes even the rest of their spousesÂ life,Â a set monthly amount of money upon retirement. This amount is determined by factors such as years of service and their salary while working. This benefit may also include additional perks including health insurance and a cost-of-living increase each year. A defined benefit plan is popular among government agencies.
AÂ defined contribution plan (DC) Â is a retirement plan where the employer usually promises to contribute to the plan, but does not guarantee there will be any certain amount of funds available upon retirement. Examples of defined contribution plans include 457, 401(k), and 403(b) plans.
There areÂ pros and cons to both types of retirement plans. Traditionally defined benefit plans offer much better retirement benefits, however in return salaries and wages are typically lower. Likewise, employers who offerÂ defined contribution plans pay higher wages but don’t guarantee any funds available at retirement.
There are many factorsÂ I would have to considerÂ before chosing a retirement benefits package if given the choice. Obviously, the percentage the employer offered to a defined contribution plan would have a great impact on my choice.
Second, many companies seem to be moving away from traditional pension plans. New employees aren’t offered the same plans older employees were offered years ago. The original retirement packages are much more taxing on the company than they originally assumed. So it appears pension plans are on the way out.
Finally, I think I like to have more control of where my money is placed. It’s my future and I feel involved more in the decisions. Most defined contribution plan have a variety of fund options available for investment. You also have control of how much money to put in these funds and can move funds around as you choose.
So, personally I would choose a defined contribution plan given the option. You have more control of your money and you typically earn a higher income while you are working. This means if you budget correctly during your working years you can save more for retirement years.Â