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Is my retirement plan defined benefit or defined contribution?

It is a terrific form of compensation from employment you have if your employer provides for a retirement benefit. The difference between defined benefit and defined contribution is significant.

It can affect your future decision making with regard to your later years in retirement. It can also affect your decisions now on how to prepare for retirement.

How a defined benefit plan works

When an employer offers a defined benefit plan, there is a set amount of money you will be eligible for once you hit the criteria to retire and collect it. Often, the amount you will receive will result from a calculation that stems from a direct result of certain elements. These elements may include:

  • The number of years you worked for the employer
  • Your age
  • Your salary

Typically, the longer you have worked for the business, the more that factor will act to increase your future benefit amount per month. Your salary is another important piece of the calculation because the higher the salary, the higher the retirement benefit.

For instance, if an employee earns $100,000 over the last five years of a 30-year tenure with the company, the annual benefit may be one percent of that average salary over those five years, multiplied by the employee's total years of company service. This would be $100,000 times 0.01 times 30 or $30,000.

By comparison, if a person worked 15 years with the last five years being with a salary of $100,000, this formula would result in a $15,000 retirement benefit. Longer tenure means bigger retirement benefit.

How a defined contribution plan is different

A main difference between defined benefit plan versus defined contribution plan is that with defined contribution, you receive no assurances of a specific amount in retirement. Instead, contributions that you make, and that your employer may add to, go into your retirement account.

You can decide how much to contribute, with limits. You can also pick from an assortment of investment options. Your employer may match some of your contributions you make from each paycheck, which can be an incentive to contribute more. The amount in your retirement account is a direct result of what you have put into it as well as the success level of your investment choices.

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The Law Office of Jessica Taylor, PLLC

The Law Office of Jessica Taylor, PLLC
14100 San Pedro Avenue
Suite 602
San Antonio, TX 78232

Phone: 210-265-6759
Phone: (210) 402-4022
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