Different employers offer different retirement plans. An employer is San Jose may offer something different than one in Chicago. It’s important to understand each type of retirement plan, so that you know what you are getting yourself into.
A defined benefit plan is a type of retirement plan that promises a specific monthly amount at retirement. It may state an exact dollar amount, such as $500 per month at retirement. It may instead offer a formula to calculate this amount, based on your salary, your age, and your history of employment with the company.
A defined contribution plan does not promise you a specific amount at retirement. Instead, you and/or your employer make contributions to a retirement account. In a lot of cases, you define how much you contribute to the plan from your paychecks. Many employers offer a contribution matching program up to a certain amount to encourage investment in your retirement. You also may be able to choose how that money is invested until retirement. At retirement, your retirement plan then pays you the balance of the account. The most popular form of this plan is the 401(K).
Understanding what kind of retirement plan you have is the first step in making wise decisions and investing in your future.
