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Pension Plans: The Basics

George Sterling | Monday, January 14th, 2013

Pension Plans were created in the 20th century, which is considered a great victory for unions. A lot of workers in this era faced problems as they neared retirement. Jobs were hardly available for those who were reaching their 50s and 60s. Several agreements were worked between the unions and companies for workers who would be given some sort of financial benefits after they had retired for a number of years. In today’s age however, pension plans have mostly become part of the history because of many new alternative plans available for retirement.

Pension Plans

Pension plan is another term of a retirement plan. These plans are mostly tax exempt and funds are usually contributed by two parties, the employee and the employer. Each of the contributors deducts some money from the annual income and that money is contributed into the plan. When the employee of the company retires, he/she can withdraw the funds that have been saved in the pension plan. Every company has its own uniquely designed pension plans; this is why the amount and fashion of withdrawal is different with each company. The most common pension plan is where the employer guarantees the employee a certain amount that will be available to withdraw upon retirement. The funds available at the end are without any regard of its performance of the investments made.

 

Are pension plans enough for retirement?

At the beginning when there was no other options available, pension plans were a great way to secure retirement. But certain legislations were passed by the government that allowed the creation of IRAs (Individual Retirement Accounts). Since the creation of IRAs, pension plans have become a thing of the past. This is because the original pension plans had foreseeable problems with it. The problems particularly included certain benefits without any regard to the performance of the investments made.

The pension plans suffered a great blow in the 20th century when the average human longevity was increased. Companies did not expect their employees to live into their 90s and it became virtually impossible for these companies to keep giving financial aid to those who had retired. Hence many changes were made to the original pension plans and when many of the major companies admitted that pension plans were no longer an affordable option. Pension plans are now overshadowed by new government sponsored investment plans like the 401K and IRAs which quickly became popular for people. However, even opting for these plans is not enough for this day’s tough economic times. It is recommended to take careful steps and diversify your investments to secure a better retirement for yourself.

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