Types of Retirement Plans

People planning for their future retirement have quite a number of plans to choose from where they can place their hard earned money. The different retirement plans can be divided into two categories.

One category is composed of what is called defined benefit retirement plans which are retirement plans that guarantees a certain amount of payout after retirement. The other category is the defined contribution type of retirement plan which consists of plans with payouts that are dependent on the amount of money contributed prior to retirement.

There are quite a number of defined benefit retirement plans that are more commonly availed by most people. There is the cash balance retirement plan that specifies a specified benefit that would be received during retirement. It can be made available as a monthly pension at the start of retirement or as a lump sum.

Cash balance plans are the traditional retirement plans that large businesses provide for their employees along with pension equity plans and other traditional retirement plans. Defined benefit plans may either be funded or unfunded.

Funded plans are those that have contributions being placed on the retirement plan by either the employer or the employee or both. Unfunded retirement plans are those where no funds are set aside that would be used. The benefits of the plan are usually paid by other means of contributions to the plan. A good example would be Social Security such as that offered in most Western countries where contributions come from current taxes as well as Social Security contributions.

Examples of defined contribution retirement plans are those that are employer sponsored plans where each member is given an individual account. The benefits that will eventually be given through these plans would depend on how much has been contributed to each individual account upon retirement less losses and expenses.

The funds of these individual accounts are usually invested to gain returns, usually in the stock market. Defined contribution plans are becoming quite popular as the retirement plan of choice for most people today.

There are also other retirement plans that have been developed to take advantage of what defined benefit and defined contribution plans offer. Such plans are called hybrid retirement plans. They are designed to combine the features of both the defined benefit and defined contribution plans. Just like defined benefit plans, some hybrid plans have investment risks that are individually sustained by the plan sponsor.

Hybrid plans follow some defined contribution features in that they usually have some sort of individual accounts for each individual and the benefits may be given upon the termination of employment. The combination of the features makes such plans more portable and attractive to a growing number of people also.

 

Posted by Ardent Editor on Aug 15 2007 in Retirement 101

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