The Link Between Your Pension and Your Job
Both a 401(k) and a 403(b) are pension plans that come with jobs. An employee might contribute to a 401(k), but the employer will also make matching payments. The degree to which the company will contribute to a pension fund will depend on the job, the company, and the profession.
Employees at large technology companies, for example, can expect to receive generous pension contributions from their employers. Those benefits help make an employment package more attractive, but they also help reduce the employee’s tax liability.
Technology workers often pay higher rates of tax. A generous pension contribution means the employee can pay lower taxes on that income when they retire. The employee gets to keep more of the company’s pay without the company having to pay extra to make sure they get to keep it.
A small firm, though, might be less able to make large contributions.
But these pension benefits are often hidden. When employees receive their pay stubs, the usual reaction is to look at the bottom line. An employee wants to know how much they received that month, and they want to be sure that it’s not less than they expected.
An employee often tends to ignore all of the deductions in the lines above the bottom of the page. Many employees might not understand or educate themselves on how deductions are calculated.
For union jobs, in particular, those extras can represent the result of years of negotiations and small additions that took place before their employment. What matters to most employees is how much money they have in their pocket at the end of the month.
Negotiate Your Pension
If you haven’t educated yourself about pension funds and how they work, you might be missing an opportunity.
When you ask for a pay rise, it’s important to remember that the job doesn’t only pay for the food and housing expenses you need to meet today. Your job must also put money aside for your pension needs.
Make sure that any pay rise includes an increase in the company’s pension contributions. That money might not feel important now, but it will be important in the future.
Similarly, if a company turns down a request for a pay rise, you can also use pension payments as a bargaining tool. The company might say that it can’t afford to increase your salary, but it might be willing to add a few more dollars each month to your 401(k) or to your pension.
In this way, a company can still show that it values your work without significantly increasing its bottom-line costs.
Again, you won’t feel that benefit now. But over time, any contribution you or your employer makes will grow with compound interest. You may well find that a contribution is worth more when you reach retirement age than a small salary bump would bring you now.
Because you won’t see your pension and 401(k) contributions for some time, it’s easy to forget that you have them. It’s also easy to forget their value and their link to your job.
Your pension is one of the most important returns that a company gives you for your labor. It’s worth remembering that when you negotiate your salary.
Do I Lose My Pension If I Quit My Job?
It’s also worth remembering the value of your company’s pension and retirement fund contributions before you quit your job.
Your retirement pool will receive income from two directions. Some of the payments will come directly from your own salary. Those payments won’t be taxed until you receive them on retirement. They’re locked away in your retirement fund, but they’re still your money. If you leave your job, that money will always be available for you.
You can choose to take those contributions out of your pension fund when you leave the company if you wish. Think hard before you merely withdraw any funds as taking money out will give you big withdrawal fees and a tax penalty.
Ask your tax advisor, but you should be able to roll-over your 401(k) that you’ve built up at your current employer into the retirement plan at your new employer. A roll-over of funds will let you continue as before, contributing part of your income to your retirement fund and adding the employer’s contributions.
Before you head out of the office for the last time, remember to pay a visit to human resources and collect all the information you can about the company’s 401(k). There’s a good chance that you’ll need that information when you reach your next job. And you will definitely need all information and numbers when you finally retire.
What Job-Switching Does for Your Pension
If you’re on a traditional, defined benefits pension plan though, the situation may be more complex. You won’t be able to take those funds with you.
Instead, the fund will stay with the employer, and your money will remain in that pool until you’re ready to retire. At that point, you can file a claim and start receiving payouts. The payouts will be based on the amounts you and your employer contributed until you left the company.
Those contributions will, though, have piled up with compound interest. Even if you only worked at the company for a short time, if several years have passed between leaving the company and your retirement, those funds could translate into a meaningful addition to your pension.
Any addition in your funds and pension amounts will be important to you. Young people start and stop jobs regularly. Every time an employee signs up with a business, whether they’re flipping burgers at a restaurant chain or filling cars at a gas station, they’re likely to be contributing to a 401(k) or a pension plan.
These younger employees then move on to a new job or head off to college and forget about the money they put into that 401(k) or have waiting for them in a pension.
Get Your Pension from Your College Job
According to the Bureau of Labor Statistics, people born between 1957 and 1964 held an average of 12.3 jobs between the ages of 18 and 52. The individual held half of these jobs between the ages of 18 and 24.
People born since 1967 are likely to find themselves flitting even more frequently between jobs. At each of those jobs, they could well be leaving behind money in 401(k)s and pension funds that they’ve completely forgotten about. All of that money could make a beneficial addition to a retirement fund.
As you plan your pension, don’t just focus on calculating the value of your fund. And don’t just look ahead to the amount that you’ll need to fund your retirement. Think back to the places you worked before and remember that you might well have money already squirreled away in an old, forgotten retirement fund somewhere.