If you have been employed throughout the years prior to retirement, you probably will have earned retirement income from your employer's retirement or deferred profit-sharing plan. In addition to providing pension benefits at retirement (normally between ages 65 and 70), such plans usually have some provision for early retirement, and may also provide death and disability benefits. Since your company designed its own plan, it may differ from others, and it is important to familiarize yourself with the description of the plan provided by your employer. The plan will be either a "Defined Benefit" or "Defined Contribution" plan.
If the plan is a "Defined Benefit" plan, it will be relatively simple for you to anticipate what your retirement income will be. As the term implies, the benefit you receive under the plan is defined by a formula that applies to all participants. Your employer contributes the amount needed to provide the defined benefit. Here are some examples of retirement benefit formulas:
• A flat benefit, such as $10 per month, for each year of your employment prior to retirement
• A percentage of your average annual salary for the five years preceding your retirement
• A percentage of the salary you receive each year of your employment prior to retirement Others are more complex:
• 20 percent of your average annual salary for the five years prior to retirement which was covered by the Social Security Wage Base, plus 45 percent of such average salary which was not covered by the Social Security Wage Base, or
• 3/4 percent of the salary you receive each year prior to retirement up to the amount of the Social Security Wage Base, plus 2 percent of the excess of such year's salary over the Social Security Wage Base, or
• 50 percent of your average annual salary for the five years prior to retirement less 50 percent of the Primary Social Security benefit you receive, prorated for services less than 30 years at retirement.
Your employer will, on request, estimate the retirement incomes, at any ages you choose. In making these estimates, the employer will probably assume no change in your salary or in the Social Security law prior to your retirement age. You will have to make reestimates to take account of such changes.
If your company has a Defined Contribution plan, the contribution made to the plan on your behalf is defined by a formula. The formula might be similar to the following:
The company will contribute each year to its retirement plan on your behalf a percentage of your salary for that year (10 percent, for example).
The company will contribute each year to its retirement plan on your behalf a percentage of your salary up to the Social Security Wage Base, plus a percentage of your salary which is in excess of the Social Security Wage Base.
At retirement, you will be entitled to the accumulation of the contributions made on your behalf and all investment income earned by such contributions. In a Defined Contribution plan, it is almost impossible to predict how much the funds will grow, and therefore how much retirement income they will provide. However, the company can make estimates based on various assumed rates of growth, annual changes in the Social Security Wage Base, changes in your salary, and actuarial rates by which lump-sum amounts are converted to annual payment of retirement income
Even though income from the Defined Contribution plan is difficult to predict, it is essential that you obtain an estimate so that you can calculate how much additional savings you should have in reserve at retirement, and the rate at which you may have to withdraw from savings.
In addition to, or in lieu of, retirement plans, your company may have a deferred profit-sharing or a thrift-and-savings plan. A deferred profit-sharing plan is designed to distribute a share of the company's profits to its employees each year. It is similar to a defined contribution pension plan because individual allocations are determined by a formula, but differs in that the amount of profits available for distribution is never known until the year is ended. In a thrift-and-savings plan, the employer matches a proportion of your contribution. For example, for every dollar you save, the employer might contribute $.25 or $.50, or some other amount. Your retirement benefits from such plans will be based upon the amount in your account at retirement from contributions made on your behalf and investment income on those contributions. Once again, it is suggested that you obtain from your employer estimates of the lumpsum or annual income payment available from these plans at your retirement.