101 Things Everyone Should Know about Economics: From Securities and Derivatives to Interest Rates and Hedge Funds, the Basics of Economics and What They Mean for You by Peter Sander

Author:Peter Sander
Language: eng
Format: mobi
Publisher: Adams Media Corporation
Published: 2014-06-14T04:00:00+00:00

51. RETIREMENT PLANS

Someday you’re going to retire. And when that day comes, you should be eligible for Social Security, assuming you’re at least sixty-two when you decide to leave that cubicle or workshop for good. But most financial experts expect that Social Security will only cover 20 to 50 percent of your income needs, especially if you are still paying for or renting a home.

That’s where retirement savings plans come in.

What You Should Know

First, it’s important to distinguish retirement plans from retirement planning. Retirement plans are special savings plans set up in the eyes of the law to provide tax incentives both for you and your employer to induce greater savings. They are also set up to be legally at “arm’s length” from your employer, so that your savings cannot be tapped or otherwise manipulated should your employer get into trouble. That’s important in these days of economic crisis and rapidly changing corporate (and public sector) fortunes.

Retirement planning is the active pursuit and calculation of your retirement needs, and how those needs will be funded in retirement—which you can do yourself if you have the skills, or with the help of a professional adviser.

There are three types of retirement savings plans. The first two are offered and administered through employers:

Defined benefit plans, as the name implies, specify the benefit. For example, you and your surviving spouse will receive $2,000 a month for as long as you live, come heck or high water. Your employer funds the plan, and its investments usually are managed by a third party; how they come up with enough to pay you is their problem. Traditional pension plans, as offered by most government agencies and legacy corporations, are defined benefit plans. These plans are going out of style because companies don’t want the burden of extra funding for the plans in bad times. The Pension Benefit Guaranty Corporation, a government corporation set up to guarantee pension benefits, estimates there were 22,697 such plans in effect in early 2013, down from 80,000 such plans in the United States in 2005, and down from 250,000 in 1980. If you have a defined benefit plan, consider yourself fortunate.

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