What are retirement benefits?
Once you retire, you can start collecting retirement benefits from your employer. Find out what are retirement benefits and the various sources of retirement benefits.
When planning for retirement, the common rule is that the early you start saving, the better your savings could be. If you start early, you can soak away as much as you can over your working years to give your money enough time to grow through compounding. Once you retire, you can start taking retirement benefits to pay for your expenses in retirement.
The term "retirement benefits" is used to refer to the benefits that an individual collects after retirement. Retirement benefits allow employees to continue receiving a benefit even after they leave employment. These benefits can be paid out as a fixed monthly income over the individual's lifetime or as a lump sum payment.
Types of Retirement Plans
If you have a retirement plan with your employer, the retirement plan can either be a defined-benefit plan or a defined-contribution plan.
A defined-benefit plan pays workers a monthly benefit in retirement based on the years they worked and how much salary they earned. A defined benefit plan is also known as a traditional pension plan, and it provides eligible employees a guaranteed income over their lifetime after they retire.
The employer decides how the money is invested to earn a return and how it is distributed to eligible employees. The distributions can be paid out as an annuity payment or lump-sum payment. An annuity payment is spread out and paid monthly over the individual's remaining years, while a lump-sum payment pays out the entire value once.
Due to the burden the defined benefit plans place on employers, most private sector employers have replaced the defined benefit plans with defined contribution plans, which shifts the burden to employees.
Defined contribution plans
A defined contribution plan is funded by the employee, and the employer may also make matching contributions up to a certain limit. The employee contributes a specific percentage of their salary to the retirement plan, and the money is invested in various investments options handpicked by the employer. The investment options may comprise mutual funds, stocks, and money market funds.
An example of a defined contribution plan is a 401(k) plan. This retirement plan allows employees to make tax-deferred contributions to the 401(k) account, and only pay taxes when they take a distribution from the account. The employer may also match an employee’s contributions either dollar-for-dollar or a partial match, up to a specific amount. Other types of defined contribution plans include 403(b), profit-sharing plans, and employee stock ownership plans.
What is a good retirement income?
Retirement experts recommend that your retirement income should be at least 80% of the pre-retirement annual income. This amount can be higher or lower depending on your other sources of income in retirement such as pension payments, part-time employment, social security, desired lifestyle, healthcare costs, and living expenses in your desired location.
If you plan to move to another state, you should find out how much you will need to meet the cost of living in the new location. If you are moving from a non-metropolitan city, your expenses in retirement might decline, and you will need less income in retirement to meet your expenses. However, if you plan to change your lifestyle and travel around the world, you will need more money in retirement to finance your new lifestyle.
Where does retirement income come from?
Once you retire, you may need to have several sources of income to live comfortably. Here are potential sources of retirement income:
If you had a 401(k) with your employer, you can start taking distributions when you retire. You can decide to take a one-time lump-sum distribution or spread distributions over your lifetime. If you delay taking distributions from your 401(k), you must start taking the required distributions when you turn 72.
However, if you have a Roth IRA, you are not required to take the mandatory distributions when you reach 72. You can delay making withdrawals from the Roth IRA until when you need the money.
Social security is a government program that pays retired workers aged 62 or older continuing income after retirement, and it is funded by the US Treasury. The benefits you receive depend on how much income you earned during your working years.
If your company maintains a pension plan, you can expect to receive pension payments once you retire. The employer guarantees employees a monthly pension payment after retirement over the employee’s lifetime. The pension payment is determined based on earnings and years of service.
While there are few private sector employers who still offer pensions, pensions are more common among federal government employees, state and local government employees, and the military.
Once you reach the full retirement age, you can decide to find a job to earn extra income to supplement your retirement savings. The work you find can be temporary or part-time, and you can work without impacting your social security benefits.