I’ve had quite a few jobs throughout my career. All the companies I worked for provided a 401k and all of them provided a 401k match. My father, brother and brother-in-law, however, work for companies that offer pension plans. Of course my first instinct is to compare the value of a 401k to the value of a pension. Here are some thoughts on the pros and cons of having a pension versus a 401k. Of course, in many cases, you can have both.
The Benefits of a Pension
Pensions are a type of retirement account called defined benefit. That’s because they typically pay out a preset amount each month during retirement. That is also one of the benefits of a pension. No matter how the stock market fares, you will still get a monthly payment that you can rely on and plan around. Perhaps this is the biggest benefit of a pension.
Another benefit is that many pensions are funded by your employer. Whereas 401ks take contributions from the employees to fund, most pensions are a benefit that is paid for by the employer. Even the pensions that require some of the funding from the employees are typically still a really good deal.
Pensions are also beneficial when it comes to taxes. Technically, you are earning money during your working years – as your pension is being funded. However, you don’t have to pay any taxes on the amount being saved on your behalf. If you are interested in learning more about pensions I suggest you search around the web for lots of good information. Now, lets look at the benefits of a 401k.
The Benefits of a 401k Plan
A 401k is a defined contribution plan. That means that you know how much you contribute but now how much the fund will be worth when you retire. The nice part about this is that you can see the value of your account on a monthly or daily basis and know exactly how much you have saved for retirement. You can also control how much money you invest by changing your contributions.
Another major benefit of a 401k is that the money is yours as soon as you contribute it. You don’t have to work there for 20 years or worry about the company going bankrupt and potentially losing your benefit. If you leave your company you can take the money and roll it over into a brokerage account or to another 401k.
And of course the matches are perhaps the best benefit of a 401k. Most employers will match your contributions up to a certain percent. Not only does this greatly improve your ability to save, but it encourages you to save more than you might otherwise.
Which is Better?
I guess I never really answered the question which is better. Personally, if I had to choose between a pension and a 401k I would choose a 401k because it is a sure thing and I have more control over it. However, if I was choosing between a job that offered a pension versus a 401k, I would choose the job with a pension if salary and other benefits were comparable. That’s because you can still fund an IRA (almost the same as a 401k) on your own. Indeed, having a pension and a healthy 401k/IRA would be the best of both worlds.