One of the many perks of working for an aeronautical behemoth is the pension. It’s a long-term retirement savings plan that guarantees a fixed monthly payment upon retirement.
Pension funds often invest in a mix of fixed-income securities and blue-chip stocks. Increasingly, they seek added returns in real estate and private equity areas.
Guaranteed Income
With a Boeing pension plan, employees don’t have to worry about the risk of investment loss. They get a steady income stream that will last their entire lives. However, that doesn’t mean a pension is without risk. For example, if the company fails and cannot afford to continue making payments, those payments will stop. Gains from the federally insured Pension Benefit Guaranty Corporation may then kick in.
Employees also don’t have a say in how the funds are invested with a pension. That could be good or bad, depending on how the fund manager supports it. If they choose risky options, the pension fund could be in trouble.
The other risk is losing your pension if you leave your job before retirement. It is because you must be vested for years before you can start receiving the regular payments. With a 401(k), on the other hand, you can invest your money in different mutual funds and change the theme of your portfolio as your financial and personal risk tolerance changes over time.
Flexibility
Pensions typically have fixed benefits based on a formula such as an employee’s final average salary or the number of years with the company. Unlike other retirement plans, they cannot vary payouts depending on their investments’ performance. In addition, pension assets aren’t portable to other retirement plans (except for some government jobs).
This lack of portability can be a drawback. For example, if you switch to another job, your employer may stop contributing to the plan or lower your payments. It can make it harder to plan your finances for retirement.
While some workers still have access to traditional pensions (defined benefit plans), they are becoming increasingly rare. As a result, people who want to be sure they have a secure retirement should supplement their savings with individual accounts, such as IRAs or 401(k)s. These accounts allow you to control your retirement investments and can be more flexible than a pension plan. However, the biggest drawback of individual accounts is that they’re subject to market volatility.
Investment Options
As a company, your pension provider has to invest the money you add to the pot wisely. But it also should ensure that the benefits you receive when you retire will be paid, which will mean taking some risks with how it does so.
Typically, the pension scheme will offer you some standard investment options, often called ‘lifestyle’ or ‘target date’ funds. These invest your money according to a strategy that, when you’re younger, will favor riskier assets like shares, and as you get older, will shift the balance of investments towards safer options such as bonds.
Other investment options include commercial real estate and asset-backed securities, loans secured by commercial or residential property. Pensions can also invest in infrastructure projects with a longer time horizon than most other investments and are more likely to generate inflation-adjusted returns.
Once you’re vested, you can usually take your pension pot with you if you change jobs, although this is less common than in the past. However, you may only be able to take part of the amount if the same company has employed you for a long time.
Tax-Deferred
Pension plans allow participants to invest their pre-tax contributions, which can help them save money and reduce taxes. Depending on the specifics of a dream, some of these investments may also earn investment income. Generally, withdrawals from pension plans are taxed at ordinary income rates in retirement.
Pensions are designed to provide consistent, reliable income throughout a person’s retirement. This consistency and reliability can make these plans a more attractive option than defined-contribution plans like 401(k)s. These are critical features for workers who face uncertainty about their Social Security benefits in retirement.
Employers also get some tax benefits for offering pension plans. However, companies with pension plans are on the hook for providing guaranteed retirement income and can’t rely on market fluctuations to offset costs. As a result, these plans are often more expensive to operate than defined-contribution options like 401(k)s.
Insurance Coverage
Not long ago, it was common to work for a company for all of your working life and then retire with a nice pension. These days, the number of allowances is much lower, and most people who work in private companies and small businesses have a 401(k) or other individual retirement account instead.
A big reason is that pensions involve investment risk, and even though many employers have insurance coverage available to protect the retirees if their employer goes bankrupt, this can be a lot of lost money. Pension plans are also subject to a lot of regulation that can add to an enormous administrative burden and higher compliance costs.
With a 401(k) or other personal retirement account, you’ll typically have access to higher contribution limits and a more comprehensive range of investments that can provide better returns than traditional pensions. That being said, pensions can still be a great option if you have a company job that offers them and you’re comfortable taking on the investment risks involved.