Are you retiring soon? Best know where your income will be coming from when you stop working. Among all kinds of retirement funds that people subscribe to, the two most common ways to get income upon retirement are through pension and Social Security.
To help you learn more about these two, we have put together their key features, similarity, and differences, so you know your options.
A pension, or defined-benefit plan, is the decided amount you will receive when you retire that was set by the company that you have worked in. These came before the IRAs and the 401(k) plans.
Following laws and regulations set by the state, employers create their employees’ private pension as their retirement account. When the employees retire, they receive monthly disbursements from this account.
Usually, the factors that affect how much the pension will include the duration of service to the company and salary rate. Some companies also give a lump sum option to their retirees instead of monthly payouts.
Currently, a private pension is slowly becoming an outdated idea, but more than 44 million people in the country are still availing of this benefit program. A lot of pensioners usually begin receiving their payouts at age 65. Up until age 72, rules regarding these provisions vary, but subject to required minimum distribution rules, pensions must be received before 72 or participants get additional charges.
Confused as a pension, Social Security benefits have been availed by a number of retirees. When you start working, you get the option to pay your Social Security fees, and upon retirement, you get to receive these as monthly payouts, much like a pension. These benefits may be availed beginning at age 62.
Similarly, like a pension, there are certain factors that are looked into when calculating how much your benefits will be. These include how old you were when you began availing of the benefits, the duration of years you were employed, and your earnings when you were paying Social Security fees. As such, this program, however, is not meant to substitute a paycheck as it isn’t enough to cover all living expenses during retirement.
Working on a pay-as-you-go system, Social Security requires you to pay fees while you are working so that those who are currently retiring may be funded. Likewise, the same will happen when you retire yourself.
There are many differences that set pensions and Social Security apart from each other. One key feature of a Social Security benefit that is not present in pension programs is disability insurance. If an employee has paid enough into the system, they become eligible to benefits if they become disabled, whereas pensions will only provide the same if the employee meets an accident during work.
Another distinction between the two retirement plans is that a retiree’s child can actually avail of his/her Social Security benefit, whereas they cannot with a pension. One more difference is that an option to receive the full sum of your benefit instead of in monthly reimbursement is available for pensions, but not in Social Security.
Both programs provide income to those who are in retirement. Pensions can be availed from age 55, but most choose to start receiving them at 65. It becomes mandatory to avail of them at age 72. On the other hand, Social Security benefits may be received at age 62.
Finally, both plans are designed to fund retirees, but they work in different ways. Both have features that may be strengths and challenges for each individual’s case. Presently, Social Security will most probably keep operating for the senior citizens, and for those who are disabled but private pensions are beginning to be deemed obsolete are slowly being replaced by defined contribution plans.
Based on materials from Investopedia