Many different retirement plans exist, providing an array of options for creating retirement income that help you support your desired lifestyle. While the best way for us to answer your specific questions is to meet with you personally, we’ve developed a list of common retirement plan types and some specific concerns you may want to think about.
Defined-Benefit (DB) Plans(1) also are known as “pension plans” and guarantee a lifetime retirement benefit to participants based on factors such as age, years of employment, and salary. If you are enrolled in a DB plan, your employer takes care of investing all contributions to the pension fund and bears the risk of providing the guaranteed level of retirement benefits. Participants in DB plans have some special financial strategizing issues. Federal rules like the Windfall Elimination Provision (WEP) mean that your pension income may reduce your Social Security benefits, depending on the rules in your state. DB Plan participants may be able to choose among different retirement income options and schedules. Because of budgetary issues, some employers have sought to reduce or modify their responsibilities to pensioners. If you are concerned about possible reductions in your benefits, consult with us about strategies to help mitigate your risk.
Defined-Contribution (DC) Plans(2) are the most popular employer-sponsored retirement plans available today. The most common types are 401(k)s, 403(b)s, 457s, and Thrift Savings Plans. As a plan participant, you decide how much to contribute to your plans from each paycheck, allocate your money between the investment choices available to the plan, and assume all investment risk. Often, your employer will match some of your contributions. Your money grows tax deferred because contributions are made with pre-tax income. Once you retire, you retain control over your assets and can choose to roll them over into an Individual Retirement Account (IRA) or other type of account.
Hybrid Retirement Plans(3) combine features of both defined-benefit and defined-contribution plans. For example, your employer may offer a cash-balance plan that they contribute to as though it were a defined benefit plan — but employees have the option of receiving the retirement income either as a stream of payments or a lump-sum distribution. Lump sums are popular, because investors can roll them into an IRA or new retirement plan, allowing retirement savings to potentially continue growing.
Supplemental Retirement Plans are provided by some employers to allow you to save more for retirement beyond what’s contributed to your primary retirement plan.
Overall, contribution limits, early withdrawal penalties, and other details can vary a great deal from one plan to another. As a result, it’s a good idea to review your retirement plan with us.