Retirement benefits come in many shapes and sizes. Larger companies typically offer workers a company-sponsored retirement plan, such as a 401(k) or pension plan. If you’re self-employed or work for an employer that doesn’t offer a plan, you might start your own individual retirement account (IRA). To make sure you’re on track to meet your retirement goals, research the different factors that could impact your retirement savings and learn what strategy will work best for your needs.
Company-sponsored retirement plans usually come in two main types: defined benefit and defined contribution. In either case, the amount of money you earn typically has a major effect on your retirement benefits. With defined benefit plans, your employer is usually responsible for contributing enough money to your account to pay out a “defined benefit” when you retire. In a defined benefit plan, the employer sponsors your retirement plan, and risk and portfolio management are controlled entirely by the company. In a defined contribution plan, such as a 401(k) plan, the amount you contribute to your account is also typically a percentage of your salary. In both plans, higher salaries can result in greater retirement benefits.
With nearly any retirement plan, the earlier you retire, the smaller your benefit will be. Your retirement benefit in a defined contribution plan is limited to the value of your account. If you retire at a young age, you’ll be missing out on years of additional contributions. The same is true if you have your own IRA account. With Social Security, you’ll receive a lot more if you begin drawing payments at 70 rather than at 62 – same goes for spouses who withdraw from social security benefits. Defined benefit plans often have a cap on the amount you can receive, but if you’re below the limit then working additional years can often raise your benefit.
Investment performance can dramatically affect your retirement benefits if you have an IRA or participate in a defined contribution plan such as a 401(k). In both of these types of plans, your retirement benefit is ultimately determined by the value of your investments. If you invest aggressively and have a few good years, your retirement benefit will likely increase. Similarly, if your investments lessen, your benefit might shrink as a result. Defined benefit plans and your Social Security payments are unaffected by investment performance, as they have a specified formula for payouts that your employer or the federal government are required to uphold.
Good Credit Habits
Even if you have been diligent about building a solid foundation of retirement income, good credit habits are an important part of the retirement equation. Balancing unnecessary debt during your retirement can have you making high-interest payments with a limited cash flow. Moreover, it can be more challenging to apply for additional credit once you’ve retired and are on a limited income.
About the Author
John Csiszar began writing in 1989 and his work appears in various online publications, including The Huffington Post. Csiszar earned a B.A. in English from UCLA and served 18 years as an investment adviser and certified financial planner.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.