A defined benefit plan ensures a specified monthly payout at retirement based on a formula that considers your income and number of years of employment. These benefits are protected, within federal limits, by the Employee Retirement Income Security Act (ERISA).
Retirement Benefits
Many state employees participate in a defined benefit pension plan. These traditional plans promise workers a fixed monthly retirement income for life based on a formula that considers average final compensation, years of service, and other factors.
Unlike 401(k)-style retirement savings plans, which are based on individual accounts and provide a range of pre-packaged investment options, the assets in state retirement and pension plan are pooled and invested by professional managers who share the investment risk across all participants.
Market downturns can impact the value of these accounts, especially near retirement. If a plan goes bankrupt, the Pension Benefit Guaranty Corporation protects the pensions.
Whether you’re several years from retirement or ready to begin collecting your benefits, it’s essential to understand the system’s intricacies. PERS offers resources and educational events to help you on your journey, including the online retirement estimator and a live or recorded retirement planning webinar.
Social Security
Many Americans rely on Social Security to support themselves after retirement. In addition to the benefit payments based on workers’ payroll tax contributions, the program also provides disability and survivors’ benefits.
While many employers have shifted away from traditional defined-benefit pension plans to defined-contribution plans (such as 401(k)s), Social Security remains a vital source of retirement income for most people. It also adjusted for inflation, providing more excellent protection from the cost of living increases than private retirement annuities.
Many public retirement systems cover employees of state and local governments around the country. Social Security covers some through agreements reached between the federal government and its agencies, while others are not.
In Ohio, those not covered by Social Security include approximately 40 percent of school teachers and more than two-thirds of police officers and firefighters. Windfall Elimination Provision reduces monthly disability and retirement payments for those not working in positions covered by Social Security.
Tax Benefits
Tax policy generally accords favorable treatment to contributions and investment earnings related to pension plans to encourage retirement savings. It is in contrast to personal savings through wage payments, which are taxed twice, once when the wages are earned and again when the investment earnings are received on the subsequent investments.
As a result, pensions are an attractive option for workers seeking secure income streams in retirement. Public pensions also shift risk from employers to employees, as the funds are pooled in a single trust and managed by professionals with long-term investment strategies. Many government employee pension systems are defined as benefit pensions, exempting them from all state and local income taxes.
Savings Accounts
Savings accounts offer a safe, convenient way to store money that can accumulate interest over time. These low-risk, high-liquidity accounts often allow you to deposit checks and are usually available by phone, online, or at the bank branch. Unlike checking accounts, savings account balances are traditionally protected by FDIC insurance or, at credit unions, NCUA insurance.
Investing in retirement plans allows you to take advantage of a professionally managed portfolio of investments with the potential for growth and long-term tax advantages. 401(k) and traditional defined benefit pension plans are two examples of retirement options that offer you a fixed monthly retirement benefit in exchange for a contribution rate set by the plan and a portion of your wages.
In contrast, a cash balance pension is a defined benefit plan that defines the retirement benefit in terms of an account balance. It means that changes in investment returns do not impact the blessings promised to participants, which are guaranteed by PBGC insurance (up to a limit).
Insurance
As a state employee, you have unique retirement savings opportunities, including a defined benefit pension plan and an additional 457 deferred compensation plan. Plus, you have insurance benefits that help protect you and your family from unexpected events.
A traditional defined benefit pension plan promises a specific monthly benefit in retirement, calculated through a formula that includes your salary and years of service. These benefits are protected, within certain limits, by federal insurance provided through the Pension Benefit Guaranty Corporation.
Defined contribution plans, such as 401(k)-style retirement savings plans, pool funds, and employee investments. Employers and employees contribute to each employee’s account, which then grows or decreases based on investment gains or losses.
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