Pensions-vs-401-k-Which-retirement-plan-is-better

Pensions vs 401k: Which retirement plan is better?

The rising elderly population:

Thanks to modern science, the elderly population is on the rise. In fact, estimates say that elderly population will skyrocket to 88 million by 2050!

And let me tell you, a lot of baby boomers barely have any savings to retire. According to the U.S. Government Accountability Office, 48% of Americans aged above 55, have no retirement savings at all. This is a huge problem because if the elderly have no savings, the younger generation would have to spend fortunes to take care of them. This creates a huge burden on the working class, as many can’t even afford to take care of them themselves.

Furthermore, the younger individuals would not be able to save up for their own retirement. This is a vicious cycle which has the potential to destroy the economy.

The three pillars of retirement:

A retiree sits on a stool, that is supported by three pillars:

  1.   Social security: The U.S. government provides income and other services to qualified workers who have served for more than 10 years.
  2.   Savings: Savings play a huge role in retirement, as they help pay for expensive medical bills and other financial emergencies.
  3.   Retirement plan: The last pillar of the stool is your retirement plan, which provides consistent cash-flow to pay for monthly expenses.

No individual can solve this global problem all by themselves. However, they can play their part by choosing a good retirement plan. Now, this is where most people get stuck, as they have no idea which retirement plan to choose. It was much simpler in the olden days when companies used to provide pensions to their employees, but now, other retirement plans such as 401k and IRAs have taken over.

This is all because life expectancy has increased over the years, and companies can no longer afford to hand out pensions. While other retirement plans have taken over in the US, there are countries that have taken a different approach. In Denmark, instead of the companies, the government takes care of the pensions. So, the government easily increases the pension rate as life expectancy goes up. Whereas in Chile, the government encourages people to work longer, so as to get better retirement facilities.

This begs the question: Which out of the two is better; 401ks or pensions?

Pensions:

Basically, pensions are monthly saved up dollars that are given as paychecks after retirement until the employee kisses mother Earth goodbye. If this sounds like a go-to plan to you, keep in mind that pensions can go as low as $1500 a month! No wonder they say that the average American needs to save up a million dollars to retire comfortably in the middle class.

The reason $1500 is too low is because of healthcare and personal assistance. With aging, comes health problems, which are a whole new burden for retirees, and even doctors because of the rising elderly patients. This is one of the reasons why healthcare is so expensive, even though the U.S. healthcare budget is at an all time high.

 

However, as long as the company exists, pensions are completely risk-free. They are also consistent, allowing you to easily plan a monthly budget for your expenses. Tax relief is another major advantage that pensions have because the employer directly took money from your paycheck to provide for your retirement.

This also saves a lot of time and hassle that retirees have to go through while paying taxes. If these benefits are convincing to you, then don’t wait for long. Start investing in a pension early to receive higher returns.

Lovemoney.com talks about the same:

“Another advantage is compound interest. The earlier you start investing in a pension, the more you will benefit from this.

In a nutshell, when you invest money in a pension, you make a return on it. In the following year, you’ll make a return on both your original sum, as well as your first-year return.

In the third year, you’ll make a return on your original investment plus two years of returns – and this continues until you reach retirement age.

So, you’ll be earning gains on previous gains, helping you to build up a decent-sized pension pot. The earlier you start, the more time you have for compound interest to work in your favour!”

401k’s:

Unlike pensions, 401k plans allow your employer to invest a chunk of your monthly salary in a fund. The better the fund performs, the more returns you receive. Although 401k plans have served many well, they have also ruined lives.

The main reason being that not everyone is an investor. So even though the retirees have full control over their fund, they find it extremely confusing to invest. Due to this, many of them make poor decisions and end-up losing money. As most of the 401ks provide mutual or index funds, the returns are directly proportional to the market’s overall performance. So, when the market is down, they end up losing money. This is exactly what happened in 2008, due to which countless workers found it extremely difficult to retire.

Yes, you read that right! This means that 401ks are inconsistent and provide irregular income. This is a massive downside of 401ks, compared to pensions, which provide regular paychecks.

The masses criticize 401k plans all because of the risk involved. However, if you flip the coin, there are plenty of benefits that you can reap.

In fact, Investopedia sheds light on the same, by saying:

“Here’s how those employer perks can work. Many companies offer to match 50% of up to the first 6% you contribute to a 401(k). Let’s say you earn a $45,000 salary. If you contribute 6% of your annual earnings ($2,700) to your 401(k), your employer would contribute an additional 50% of that amount. That’s $1,350 of easy money.

Some employers even go one better and match your contributions dollar-for-dollar for up to the first 6%, which would add another $2,700 in this scenario, thus doubling your annual contributions to the plan.”

Along with higher returns, 401ks also don’t charge any taxes and shield you from creditors.

Conclusion:

If you have enough savings, and investing experience, I highly recommend choosing a 401k. But if you’re looking for stable income, without having to worry about market performance, then pensions are surely a better option. However, keep in mind that pensions are slowly fading away as 401ks take over.

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What is the one disadvantage that 401ks have?

Not everyone is an investor, so 401ks are fairly confusing for many people. Due to this, many of them make poor decisions and end-up losing money. As most of the 401ks provide mutual or index funds, the returns are directly proportional to the market’s overall performance. So, when the market is down, they end up losing money. This is exactly what happened in 2008, due to which countless workers found it extremely difficult to retire. Yes, you read that right! This means that 401ks are inconsistent and provide irregular income. This is a massive downside of 401ks, compared to pensions, which provide regular paychecks.

What are the three pillars of retirement?

A retiree sits on a stool, that is supported by three pillars:(i) Social security: The U.S. government provides income and other services to qualified workers who have served for more than 10 years.(ii) Savings: Savings play a huge role in retirement, as they help pay for expensive medical bills and other financial emergencies.(iii) Retirement plan: The last pillar of the stool is your retirement plan, which provides consistent cash-flow to pay for monthly expenses.

What are pensions?

Pensions are monthly saved up dollars that are given as paychecks after retirement until the employee kisses mother Earth goodbye.

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