WHERE DO YOU WANT YOUR MONEY TO TAKE YOU TODAY?
rules apply to an employer’s contributions. You are always 100-per- cent vested in any contribution you make on your behalf.
DEFINED BENEFITS VERSUS DEFINED CONTRIBUTION PLANS. The two most commonly used methods to calculate retirement benefits are the defined contribution and defined benefits plans. With the defined benefits plan, employees will know exactly how much they will receive in retirement benefits before they retire. This is because the way the benefits are paid out and calculated are expressly defined in the plan’s provisions. This also means that no matter how well or poorly the underlying investments do, the employer must pay out the benefits. There will be no deviation from the formula. Usually, the formula includes the number of years of service and the amount of money the employee was making. For example, you worked for XYZ Company for 25 years. They based their defined benefits plan on the average of your final (and usually, highest) 3 years of income, which works out to $78,000. Their formula stipulates that you will receive three percent of your salary average for each of your years of service. Your annual benefit would be $58,500.
DEFINED BENEFITS ILLUSTRATION
Average salary for final three years Percentage paid Years of service Annual benefit = $78,000 25 3%
= $78,000 = 3% = 25 = $58,500
Under a defined contributions plan, the plan provisions detail the amount of contribution that the employee and employer must make. Then, at retirement, the employee is granted whatever monthly ben- efit those contributions will afford. While this type of plan also takes age, years of service, and income level into consideration, the most important factor is the investment return on the contributions. A defined contribution plan guarantees the employee nothing in the way of benefits except for what the fund managers have been able to