“It’s clear that most Americans aren’t saving enough for retirement, and it’s easy to put the blame on the current 401(k) and IRA retirement system. After all, the good old days when a traditional pension plan was much more popular seemed wonderful: You could quit your job, sit back and still get monthly income like clockwork. But blindly claiming that the pre-401(k) days are better is just inaccurate, because there are plenty of reasons the do-it-yourself system is better,” says USNews.com contributor, David Ning.
First off, not everyone had a pension available to them. Only about 40% of Americans were able to utilize this retirement plan. The majority of workers did not have a great way to save for retirement. Today, most large companies offer a 401k plan. Even if one is not available to you, anyone can open and fund his or her own IRA plan.
Next, pensions take much longer to vest. Normally, you need to stay with an employer for at least a decade to take full advantage of a pension. If a better job opportunity arises, you are less to leave your current place of business since you will lose your pension and be stuck starting from scratch. 401k plans, on the other hand, are much easier to take with you. Money you contribute is yours…no one can take it from you. If you receive a employer match on those contributions, usually the vesting period is much, much sooner.
Taxes are better controlled with a 401k or IRA. When figuring out your taxes, you must include all monthly pension money. This income, whether you need it or not, may force you to pay higher taxes than with other types of plans. With a 401k, you can wait on distributions or only withdraw what you need. You may even be able to convert money into a Roth option without ever paying taxes on that money.
When an emergency arises, you can utilize your 401k or IRA to pay for the expenses. It’s never recommended to take money from your retirement savings, but you have that option if you need it. Roth IRA contributions can be taken tax-free after five years. You can take a loan out of your 401k at anytime. You cannot do this with a pension and if you’re forced to leave a job for an emergency, you might lose your pension entirely.
A pension provides for you (and you alone) until you pass away. If you’re smart and don’t need all of your retirement funds, you can usually leave your plan to a beneficiary. Therefore, not only do you benefit from the plan, but so may your heir(s).
Finally, you can invest your 401k the way you want. If you take the time to research, you can earn significantly more than you could ever make with a pension. The onus is on you to make smart financial decisions. It’s best to contact a financial adviser to help you invest your money smartly. Afterall, future you is counting on present you!