Updated: Jun 15
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
Defined-Benefit (DB) Plans 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. Though DB plans are disappearing, they are still common among public school systems and universities across the United States. 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 planning 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 your financial advisor or wealth manager about strategies to help mitigate your risk.
Defined-Contribution (DC) Plans
Defined-Contribution (DC) Plans 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), an annuity or other type of account. If you participate in a DC plan, regular contributions to the plan and selecting the proper investments are the two most important factors to create a sufficient retirement nest egg.
Hybrid Retirement Plans
Hybrid Retirement Plans 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. The new Retirement Savings Plan (RSP) offered by SURS (the IL State Universities Retirement System) is a hybrid plan with a 7.6% match to an employee’s 8% contribution from each paycheck. Once an employee meets eligibility requirements, she has several options to choose from including rolling funds to an IRA or purchasing an annuity with or without survivor benefits.
Supplemental Retirement Plans
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. For example, your employer may offer a defined benefit pension plan as well as an optional 457 or 403b defined contribution plan.
If there are gaps in your retirement plan, it is best to spot them early while you can course correct instead of waiting until your retirement is imminent.
As you near retirement, you will want to consider questions like these:
How much income do you need in retirement?
Will my pension or defined contribution plan provide sufficient income?
Do you need survivor-benefit options for your spouse?
What other sources of income do you have?
Do you plan to work after retiring?
What is the age difference between you and your spouse?
What are your health care insurance options?
Do you have long-term care insurance?
Contribution limits, early withdrawal penalties, and other details can vary a great deal from one plan to another. It’s a good idea to review your retirement plan benefits with your employer or with a qualified financial representative from SURS if you work for a university in Illinois. No matter what type of retirement plan you have, a financial advisor can help evaluate your options and choose a strategy designed to maximize your retirement income while protecting your wealth.
Are you comfortable with your progress towards retirement? Do you need help navigating complex retirement plans? If you have a net worth over $2 million and need help from a wealth manager, the Peak Wealth Planning team can assist you.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.