Get a Financial Life by Beth Kobliner

Author:Beth Kobliner
Language: eng
Format: epub
Publisher: Touchstone
Published: 2009-01-03T16:00:00+00:00

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A NEW TYPE OF OLD-FASHIONED PENSION

In your parents’ (or grandparents’) era, employees stayed with the same company for twenty or thirty years, and many were rewarded at the end of their work lives with pensions paid for by their employers. Today, these old-fashioned pensions, known as defined benefit plans, are virtually extinct.

But not all employers have abandoned pensions altogether. The new trend is toward something called cash balance plans. For many younger workers, these plans may actually be an improvement over the old ones, since they’re “portable,” meaning you can take the money with you if you leave the company before you retire. Traditional pensions rewarded employees for staying with companies for a long time and the benefits increased significantly as these workers neared retirement. But most people today don’t plan to spend the rest of their lives at one company. Cash balance plans address that reality.

If you work for a company that offers a cash balance plan, you don’t have to sign up; that’s done for you. Here’s how they work: Your employer simply puts a given amount of money—typically 5% of your salary—toward your pension every year. This isn’t money from your earnings; it’s money from your employer. Once you’re vested, which usually takes about three to five years, you’ll be able to keep those benefits even if you leave your job. Contributions don’t increase as you get older.

Seniority doesn’t enter the picture, and that means two things: Younger workers can accumulate benefits earlier than they used to, and they can move from job to job without worrying about qualifying for pension benefits. If your employer offers you the chance to switch from a “defined benefit” plan—the name for the old-fashioned type of pension—to a cash balance plan, take it.

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