Some people retire on income from an employer-sponsored defined benefit pension plan. Employers that sponsor defined benefit pension plans are responsible for contributing enough to fund promised benefits.
U.S. Department of Labor data show a trend away from defined benefit plans and toward defined contribution plans, though. A key difference is that the employer bears the investment risks of a defined benefit plan. In defined contribution plans, employees bear the investment risks, and there is no guarantee that your defined contribution account balance will be adequate for your retirement.
Another difference is that defined benefit plans generally are required to make annuities available to participants at retirement. If you have a pension plan that provides a lifetime annuity, it protects you against longevity risk, the risk of outliving your assets. Defined contribution plans, such as 401(k) plans, typically do not provide an annuity option.
The trend toward defined contribution plans means employees are responsible for saving enough for retirement and for ensuring that their savings last through their retirement years. Here is some information to help you manage this.
Retirement Asset Allocation
The most common reason to change your asset allocation is a change in your investment time horizon. As you get closer to your investment goal, you’ll likely need to change your asset allocation. For example, as they get closer to retirement age, most people hold less stock and more bonds and cash equivalents. You may also need to change your asset allocation if there is a change in your risk tolerance, financial situation, or the financial goal itself.
Lump Sum Payments
Some people cash out retirement accounts and receive a lump sum payment. Receiving a lump sum payout can be very exciting because most people rarely have the opportunity to spend or invest a large amount of money at one time. But figuring out what to do with a lump sum payout also can be very stressful, especially if you aren’t comfortable making financial decisions.
Once you fully understand all of your options, you’ll be in a better position to make a financial decision. So resist the urge to make a quick decision about how you’ll use your lump sum payout. Many experts recommend that you take several months or even a year to decide how you’ll use the money.
Before you make any decisions, consider these questions:
- Am I carefully avoiding fraud?
- What is my current financial situation?
- Do I need the help of a financial professional?
- Have I paid off my high interest credit card debt?
- Have I asked enough questions?