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Pensions vs modern retirement
When you hear about retirement planning the words that tend to echo in your mind are the “choices you make now will play a big role in your life later on”. There are 2 main types of retirement plans, pensions and the modern retirement system. Both of these have different pros and cons, as well as different optimization strategies to get the most out of them. So lets look at pensions and modern retirement plans as well as a way for you to get the best of both worlds.
Pensions are percentage based retirement income plans that are correlate between the number of years that you have worked. These are most commonly found in public sector jobs, ie government jobs. Because pensions are based off of years of service these are ideal for people who want to stay with a single organization. The key benefit of pensions is that this income is guaranteed to the beneficiary. This is appealing as many view the stock market as carrying some risk. Money to fund the pension account is typically taken out of your paycheck and collected with many others. The main drawback to the pension system is that typically the wages are lower than private sector jobs, and it takes a very long time to accumulate enough service time to earn a significant amount of income. For those looking to draw the full maximum amount this typically takes at least 40 years of working, usually leading to a later retirement date.
The modern retirement system is very different than the pension system. The modern retirement system is driven exclusively by the individual. Retirement accounts may use different stock market assets to generate the retirement income that is draw upon. Occasionally you may find organizations who will match retirement contributions as an additional perk. Because this form of retirement is self driven it puts a lot of pressure on the individual to invest, so if you are unprepared for retirement it typically is the result of poor management of your personal finances. Almost all organizations offer this type of retirement plan, even organizations that offer pensions have this in conjunction.
The best thing you can do is utilize both systems as there strengths cover the weaknesses of the other. However the ability to use both is typically limited to government jobs. If you do not work in those types of careers, a helpful way to mirror a semblance of income is to work on passive income assets. This can take the form of dividends outside of the retirement accounts, real estate, or other side hustles.
Ultimantely, there is no right answer to which is better. Both take planning and careful consideration of finances to get the most out of your working years to have a comfortable retirement.
