What You Must Know About Pension Plans

If you are in the workforce today, the chances you have a defined benefit pension plans are pretty slim. Outside of a few industries with active union membership, most corporations have done way with them as part of cost-cutting measures. Of those who lucky enough to have one, a recent study by Fidelity Investments found 71% of the individuals polled were unaware of the major details – they were unable to answer questions about simple things like when payments begin. If a pension is part of your retirement planning, here are a few keys to understand:
Vesting Schedule
Pensions were originally intended, at least in part, to reward employee loyalty. In order to incentivize the benefit, employers created a timeline by which these accounts would “mature” to the full amount. If, for example, you become eligible for vesting after five years with the company, over the next five years you might have accrued 10% of the maximum allowed by the IRS. Five years after that, you might be up to 20%, and so on until the contribution limits are reached. This value cannot be taken from you, even if you were to leave the company – the account will be frozen until you reach retirement age.
Payment Calendar
Most defined benefit plans pay out in equal amounts on a periodic basis until the annuity is exhausted, but you have options as to how often the disbursements arrive. You can decide on monthly, quarterly or annual checks based on your preference and the balances you will receive from other parts of your investment portfolio. (Some even permit a one-time payment at retirement. Though you might choose to hold off on receiving them for a while if the stock market is flying high, you will have to make a decision by age 70 or April 1 of the year following your retirement, whichever is later.
Estate Planning
In the event you pass on before the end of your pension annuity, the plan will set aside options to ensure your spouse is able to claim at least a portion of the amount you’ve accrued. Depending on the way your benefits are structured, particularly if you chose the joint/survivor option, it’s possible to continue the payment calendar with a minimum of 50% of the periodic disbursement and ensure your loved one is provided for when you’re gone.

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