Private Pensions And Their Importance

Successful retirement is traditionally based on a three-legged stool, consisting of social security, savings and assets and a pension.

Pension Plans

A pension is a sum of money for an individual’s retirement. A pension may be paid in installments over a period of time or as a lump sum. It sometimes is referred to as a “pension benefit.”

A pension plan is a written plan or program set up by an employer, union or both to set aside money to be invested for pensions for employees. A pension plan is a trust, whose trustees must act solely in the interests of the plan’s beneficiaries.

A pension fund holds the money contributed to the plan over time to pay for pensions. A pension fund is kept apart from the employer’s assets.

 

Importance of Pension Plans

It is critical to understand the necessary planning for retirement. Especially since 50 million workers of the “baby boom” generation are expected to retire around 2010. Successful retirement is traditionally based on a three-legged stool, consisting of social security, savings and assets and a pension.

Social security by itself was never intended to provide adequate retirement income. It provides a typical full-career worker about 39% of pre-retirement income, only a “floor” of protection. In 2009, the average retired worker received about $1,153 per month, and the average couple received $1,876 from Social Security.

For a majority of retirees, their assets and savings provide an inadequate income during retirement. Yet, people are living longer and will need larger amounts of savings for their retirement.

Consequently, pensions can make all the difference in maintaining a decent standard of living in retirement. Among those 65 and older, pension income composed around 19.5% of all income received, with an average annual benefit of $16,079 in 2008, according to the Congressional Research Service. 

The money that employers pay into pension plans and the earnings on these amounts are normally tax deductible to employers and also are not included in employees’ income. The size of this tax subsidy is enormous.

 

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