Ways to Protect and Boost Your Pension

Whatever your age, you need to think and plan for your retirement and pension. Most full time and many part time employees in the United States are covered by some form of pension. This is because the U.S. Government gives tax benefits to those companies that offer pension plans to their employees. Companies also find the pension plan an attractive tool to attract and retain workers in these times when no employee stays for a lifetime with the same company.

Different Types of Plans

  • Defined Benefit Plans: These are plans where the employer guarantees a fixed income for the employee throughout their retirement life.
  • Defined Contribution Plan: Here the employer guarantees a fixed sum to be contributed to the employees’ retirement fund each year or month. 401(k) plans are typical examples of defined contribution plans. Whichever plan is on offer, there are both advantages and disadvantages. A fixed income plan will see inflation eating away the value of the retirement dollars. A fixed contribution plan can see its value eroded by a sudden fall in the stock markets as has happened recently. This makes it essential for the regular employee to plan their retirement funds carefully.
  • Roth 401(k): Even as you invest in a regular 401(k) plan, start making investments in a Roth 401(k) plan as well.

Protection and Savings Tips

  • Do not put all your eggs in one basket. Diversify your investments into high paying shares and low risk sovereign bonds. If you are under 40, the ratio can be skewed in favor of high risk shares. As you grow older, gradually alter the ratio, so that by the time you are 60, the ratio is skewed in favor of bonds.
  • Retire late: One of the best ways to protect yourself from financial stress in old age is to continue to work as long as you are able. If you are no longer able to work full time, consider working part time or freelance. Offer your skills and experience as a consultant.
  • Upgrade your skills: When you are still working, constantly upgrade your skills and reinvent yourself. This way your pay will increase dramatically and you will be able to save more toward your pension.
  • Save regularly: Apart from your pension fund, consider investing regularly in an annuity or monthly income scheme with guaranteed income. Choose the company properly as it will have to outlive you.
  • Your goal should be to save at least 15 per cent of your income toward your retirement. This can go as high as 50 per cent in case you want to maintain a higher standard of living as you grow older.
  • Consolidate all your savings: Do not let money lay in low returns current accounts. Keep some money for emergency use and invest the rest in shares or bonds.
  • Pay off debts first: As you pay a higher interest than the bank pays you, it makes sense to pay off all your debts including your mortgage before you start saving for your retirement. Consider prepaying your debts as soon as possible and then start an aggressive savings program for your retirement.
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