A pension plan is a retirement account that is sponsored and funded by your employer. That means that it is your employer’s responsibility to contribute funds to your retirement pool. These earnings are then set aside so that you’ll receive a guaranteed monthly income during retirement — not a bad deal if you ask us.
What is a pension plan?
A pension plan, simply put, is a savings plan. It enables people to put aside money each month to have an income when they stop working. The payments are often tax-deferred. Instead of paying tax on the income as you earn it, you’ll pay the tax when you receive it after you’ve retired.
Because your income will be lower when you no longer work at a regular job, your tax rate will also be lower too, enabling you to keep more of your money.
Lowering your tax rate may sound strange, but the government wants to encourage you to save for your retirement. The government wants to be sure that that you’ll be able to look after yourself when you retire so that they won’t have to do the job for you.
The pension payments you make go to an investment firm. That firm uses these funds to buy a portfolio of bonds and stocks. Managed by professional investors, the funds grow and earn compound interest over the years so that a retiree will have a sizeable sum when they stop working.
Pensions make up one of the biggest areas for investment. According to the OECD, pension funds held more than $32 trillion in 2019. Most of that money, nearly $19 trillion, is held in the U.S. When you hear about movements in the stock exchange and in the money markets, much of that money is funds that will one day go to retirees.
- What is a pension plan?
- How does a Pension Plan Work?
- How a pension works
- The Move to Defined-Contributions
- Are pensions taxable?
- The Difference Between a Pension and a 401(k)
- The History of the Pension Plan
- The Link Between Your Pension and Your Job
- How to Find Old 401(k) and Pension Accounts
- Vesting Your Pension Funds
- It’s SEP to You
- Do You Really Need a Pension?
- How Much Should You Contribute to Your Pension Plan?
- How Much are You Allowed to Contribute a Pension Plan?
- Where’s My Money?
- Calculating the Value of Your Retirement Fund
- Common Causes of Errors in Pension Calculation
- Can I Tap My Pension Plan Early?
- Monthly Annuity or Lump Sum?
- Are There Any Risks Involved With Pensions?
- What Happens With My Pension When I Retire?
- What Happens to Your Pension if You Die?
- Can You Have a Pension and 401(k) and IRA?
- Final Retirement Tips