Whether it’s a pension or a 401(k) plan, the type of retirement policy you have will often determine when you can retire. Learn more about a 401(k) and a traditional pension plan.
A 401(k) is an employer-sponsored retirement account that allows an employee to divert a percentage of his or her salary—either pre- or post-tax—to the account. A traditional pension plan offers retirees a fixed monthly benefit for the rest of their lives. How do they work?
A notable difference between these two retirement plans is that 401(k) plans are defined contribution plans since the employee is primarily responsible for funding, while traditional pensions are defined benefit plans as the employer funds the program
Fewer companies today offer traditional pensions; however, you can have a pension and still contribute to a 401(k) and an IRA. Contributing to a variety of retirement vehicles can be a smart retirement strategy.
You can either leave the money from your 401(k) in your former employer’s plan or you can roll over that money into an Individual Retirement Account (IRA) or an annuity. Rolling over your 401(k) will give you more control over how your money is invested. This is also a good time to begin consolidating the various retirement assets you may have accumulated, making your retirement planning more manageable and easier to track.
Most people choose to roll over or transfer their funds to an IRA or to the 401(k) plan of a new employer. A Roth IRA is another type of individual retirement account. The difference is that with a traditional IRA the money you put in isn't taxed, but withdrawals are. With a Roth IRA, the money you put in is taxed, but when you take it out the money you’ve invested isn't taxed. If you have not reached age 59½, though, you may owe taxes and a 10 percent penalty on earnings. A much less popular option is to cash out your 401(k), but this comes with significant penalties; income taxes must be paid, and if you’re under age 59½ there will be an additional 10% penalty tax. When considering rolling over the proceeds of your retirement plan to another tax-qualified option, such as an IRA, please note that you may have the option of leaving the funds in your existing plan or transferring them into a new employer’s plan. You may wish to consult with your new employer, if any, to learn more about the options available to you under your plan and any applicable fees and expenses. You may owe taxes if you withdraw funds from the plan. Please consult a tax advisor before withdrawing funds.
One example has already been discussed here: traditional pensions, which offer a fixed monthly benefit for the rest of your life. Another option is a Guaranteed Lifetime Income Annuity. This type of annuity, will provide a steady stream of income that's guaranteed to last for the rest of your life—no matter how long you live.1 If you purchase an annuity, you won’t have to worry about the impact that a decline in the market would have on your payments.
Many 401(k) plans offer a stable value option. This pays a guaranteed rate of return for the year. The rate will change from year to year, but it is relatively stable. While it is safe in terms of preserving your money, it does not provide the upside potential that riskier options may provide.
While there are many potential reasons for those with 401(k) plans to retire later, most of them can be boiled down to a single word: uncertainty. While traditional pensions promise retirees a fixed monthly benefit for the rest of their lives, 401(k)s and other defined contribution plans offer no such guarantees.
Since the money we set aside in a 401(k) may have to last well into our 80s or 90s, it comes as no surprise that workers with these plans are delaying retirement in order to build the largest possible nest egg.2
With a 401(k), the burden of saving for retirement shifts from the employer to the employee. But how much money do we need? While financial experts routinely toss around figures that range between $1 million and $2 million, the amount we need to save depends greatly on the lifestyle we hope to lead.
New York Life is here to help you learn more about Guaranteed Lifetime Income Annuities or other retirement options.
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This article is for informational purposes only. Neither New York Life nor its agents provide tax, legal, or accounting advice. Please consult your tax, legal, or accounting professional before taking any action.
1Guarantees are subject to the claims-paying ability of the issuer.
2“Boomers Find Reasons to Retire Later,” Research at Boston College. November 29, 2018. https://squaredawayblog.bc.edu/squared-away/boomers-find-reasons-to-retire-later/