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Encyclopedia > Retirement plan

A retirement plan is an arrangement to provide people with an income, or pension, during retirement, when they are no longer earning a steady income from employment. Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions. Retirement plans are more commonly known as pension schemes in the UK and Ireland and superannuation plans in Australia. This article does not cite any references or sources. ... Retirement is the point where a person stops employment completely. ...

Contents

Types of retirement plans

Retirement plans may be classified as defined benefit or defined contribution according to how the benefits are determined. A defined benefit plan guarantees a certain payout at retirement, according to a fixed formula which usually depends on the member's salary and the number of years' membership in the plan. A defined contribution plan will provide a payout at retirement that is dependent upon the amount of money contributed and the performance of the investment vehicles utilized.


Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution plans. They are often referred to as hybrid plans.


Defined contribution plans

In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, often through the purchase of an annuity which provides a regular income. Defined contribution plans have become more widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of DB plans in the US has been steadily declining, as more and more employers see the large pension contributions as a large expense that they can avoid by disbanding the plan and instead offering a defined contribution plan. Annuity contracts are offered by organizations and individuals that may accumulate value and take a current value and pay it out over a period of years. ...


Examples of defined contribution plans in the USA include Individual Retirement Accounts (IRAs) and 401(k) plans. In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined mutual funds to selecting individual stocks or other securities. Most self-directed retirement plans are characterized by certain tax advantages, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain age. Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. ... The 401(k) plan is a type of employer-sponsored defined contribution retirement plan under section 401(k) of the Internal Revenue Code () in the United States, and some other countries. ... Invest redirects here. ... This article deals with U.S. mutual funds. ... For other uses, see Stock (disambiguation). ... For security (collateral), the legal right given to a creditor by a borrower, see security interest A security is a fungible, negotiable instrument representing financial value. ... Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. ...


Defined benefit plans

Traditionally, retirement plans have been administered by institutions which exist specifically for that purpose, by large businesses, or, for government workers, by the government itself. A traditional form of defined benefit plan is the final salary plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the accrual rate.


The final accrued amount is available as a monthly pension or a lump sum.


In addition, many countries offer state-sponsored retirement benefits, beyond those provided by employers, which are funded by payroll or other taxes. In the U.S., this is one role of Social Security. This article is the current Taxation Collaboration of the Month. ... Taxes redirects here. ... For other uses of terms redirecting here, see US (disambiguation), USA (disambiguation), and United States (disambiguation) Motto In God We Trust(since 1956) (From Many, One; Latin, traditional) Anthem The Star-Spangled Banner Capital Washington, D.C. Largest city New York City National language English (de facto)1 Demonym American... Social Security, in the United States, currently refers to the federal Old-Age, Survivors, and Disability Insurance (OASDI) program. ...


Defined benefit plans may be either funded or unfunded. In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an actuary. In many countries, such as the USA, the UK and Australia, most private defined benefit plans are funded, because governments there provide tax incentives to funded plans. Damage from Hurricane Katrina. ...


In an unfunded plan, no funds are set aside. The benefits to be paid are met immediately by contributions to the plan. Most government run retirement plans, such as the social security system in the USA and most European countries, are unfunded, with benefits being paid directly out of current taxes and social security contributions. In some countries, such as Germany, Austria and Sweden, company run retirement plans are often unfunded.


Hybrid plans

A cash balance plan is a defined benefit plan made by the employer, with the help (some critics say the connivance) of consulting actuaries (like Kwasha Lipton, whom it is said created the cash balance plan) to appear as if they were defined contribution plans. They have notional balances in hypothetical accounts where, typically, each year the plan administrator will contribute an amount equal to a certain percentage of each participant's salary; a second contribution, called interest credit, is made as well. These are not actual contributions and further discussion is beyond the scope of this entry suffice it to say that there is currently much controversy. A Cash balance plan is a defined benefit retirement plan that maintains hypothetical individual employee accounts like a defined contribution plan. ... Actuaries are business professionals who deal with the financial impact of risk. ... 2100 North Central Road, Fort Lee, informally known as the Kwasha Lipton Building. ...


Target Benefit plans are defined contribution plans made to match (or look like) defined benefit plans. This would only work if all actuarial assumptions are actually realized. A Target Benefit plan is a defined contribution plan that is made to appear like a defined benefit plan. ...


Contrasting types of retirement plans

Advocates of defined contribution plans point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts. This debate parallels the discussion currently going on in the U.S., where many Republican leaders favor transforming the Social Security system, at least in part, to a self-directed investment plan. The Republican Party, often called the GOP (for Grand Old Party, although one early citation described it as the Gallant Old Party) [1], is one of the two major political parties in the United States. ...


See also

This page may meet Wikipedias criteria for speedy deletion. ... Fee-Only financial advisors , as defined by the review materials for the Certified Financial Planner exam, are compensated only by their clients and accept no commissions or compensation from other sources, such as insurance products or investments; rather, fee-only advisors charge only hourly or fixed fees (including retainers). ... A retirement plan is an arrangement to provide people with an income, possibly a pension, during retirement, when they are no longer earning a steady income from employment, or an asset from which a person may draw an income from as needed. ... UK Pension Provision falls into three major divisions: State Pensions Occupational Pensions Individual Pensions // State Pensions The state provides basic pension provision to prevent poverty in old age. ... Superannuation is a pension scheme in Australia. ... CPF Building, headquarters of the CPF Board, is located on Robinson Road. ...

External links

  • Creating a Retirement Plan Articles on MSN Money

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