Defined Contribution
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Employers like DC plans because the plans limit the employers liability to only what they have agreed to contribute.... not a lifetime pension to the retiree.
In contrast, the Defined Benefit Plans will pay a lifetime benefit, regardless of investment earnings and plan factors.
Back to Defined Contribution Plans, which usually consists of two factors:
the employee payroll deducted contributions
the employers contributions (which often "match" the employees contribution to a certain limit)
The total of these two contribution factors (employee and employer) is invested... and you earn money based on your selection of funds. It's the employee's retirement fund, that WINS or LOSES in the investments. The employee bears the burden of the economy. Right?
If you are close to retirement and the market is down, as it is today (October 2008), your funds are down. Now IF you have time before you'll actually use those funds, they may get back up to where you have sound financial footing.. but if you need the funds immediately, for your retirement - you may have to consider working longer.
You only have so much money in your funds... whatever that amount is when you retire. If the stock market takes a hit, so does your retirement funds. If you have a crisis in your life, even temporarily, you use the funds that you had hoped to use later in life (for example, one of your adult children moves back in, or a hurricane takes off your roof). Once used, those funds are long gone...
In Defined Benefit plans, your pension benefit never ends. Unfortunately, the Defined Contribution plan is only good as long as you have funds left. If you use your funds in the first 20 years of retirement, and live another ten years, you live on Social Security alone late in life...
Assuming you receive Social Security payments, and you need a higher monthly income, it comes from your retirement savings fund. If you have a Defined Contribution plan, you will supplement your income as you go... the problem being -- when its gone, it's gone!
I often wonder -- WHAT will happen to all the Boomers who near retirement in the next five to ten years? The market is down... and will it renew itself as history says it always does.. or not?
HOW will all these folks retire? Does this mean everyone will work many years longer.. maybe!
Questions? Email me.. I want to help folks determine how to retire. I might be able to help with your pension calculation or explain your options... just ask!
More Retirement Advice here!
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