The Benefits and Drawbacks of Pension Plans

A pension plan is a unique investment vehicle to fund your retirement. Depending on how the pension is set up, you will have several advantages over other forms of investment. While the pension does present you with some advantages, it is not without its fair share of drawbacks as well. Here are a few benefits and drawbacks of pension plans.

Benefits

Provide for retirement- With a pension plan, you are taking the necessary steps to provide for your retirement. If you fail to plan ahead, you will not be able to provide for you and your spouse upon retirement. The retirement years should be the best of your life. If you do not take the necessary steps to plan for it, they could be the worse. Pension plans take care of this need so you can focus on other things.

Guaranteed income- Unlike other forms of investment, pensions can represent guaranteed income. If you work for an employer that pays for your pension fund, then you know that you will be getting a certain amount of income upon retirement. Compared to other retirement accounts like a 401k, it does not depend on investment performance. You simply work as long as you are supposed to and the retirement benefits will be there when you are ready for them.

Employer contributions- Some pensions are set up so that the employer funds the whole thing. Although that particular type of pension may be difficult to find anymore, there are companies that still offer them. With a 401k, you are responsible for funding the account out of your own paycheck. This means that you will have to live on less money than you actually make. When the employer takes care of funding the pension for you, you can take that responsibility off of your plate and live on your entire paycheck.

Drawbacks

Lack of options- With a pension plan, you do not get the flexibility that comes with other forms of investment. With a 401k or IRA, you get to oversee exactly where your money goes. You can pick the investments that your money is going into. With a pension, you can have very little control over the money and it can be frustrating.

Limited opportunity- When you can not invest in different things with your retirement money, you will not be able to net a large return. Your money will grow slowly and steadily over time. With a 401k, you can really hit a home run and come away with a huge return if you choose the right investment. However, with a pension, you will know exactly what to expect. For those that enjoy investing, this takes some of the fun and excitement out of the process. You work for a certain amount of years and you make a certain amount of money each month once you retire. This really limits the opportunity that you might have with other plans. 

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