What Is The Purpose Of A 401k Pension Plan?

A pension, also known as a 401k plan or retirement plan, is a savings plan which allows people to set aside a portion of their income for when they retire.

Usually this occurs as a private pension (something you save yourself), although in some countries the government offers a state pension.

Retirement Plans

In the past, employers would offer their employees a retirement plan which provided them a sum of money at retirement without the employee having to contribute towards it.

This was obviously a major perk, as in addition to the retirement plan there were also other benefits the job would offer.

However it did mean that in order to qualify for this retirement plan, the employee would have to stay at the same company for the rest of their life. Otherwise they wouldn’t get all the money.

Pension Plans (401k)

Although many companies still do offer retirement plans, they are not as common as they once were.

As a result, most people now have to save for their future by themselves by taking out a pension plan (401k), which can either be set up by themselves, their employer or an insurance company.

With a 401k pension plan a portion of an individual’s income is automatically deducted from their pay check, or transferred from their bank account on a recurring monthly basis.

This money can then be withdrawn free of charge when they retire, or withdrawn for a fee should they choose to withdraw it earlier.

Some employers will also match the amount of money you save pound for pound, although usually it is less than this (around 50%).

This can make 401k pension plans a very attractive option, because it means that when you retire you could have up to two times the amount of money available to you than what you originally saved.

Money In A Pension Plan

When you put your money into a pension plan, you can decide how that money is invested by choosing from a list of investment options provided by your employer.

If your employer has the 401k pension plan in mutual funds, then you will be able to divide it amongst various stocks and bonds should you so desire.

Investing Your Money

Since many people know little about investing, choosing how to invest their money can be a daunting prospect.

Employers are generally not too keen on advising how their employees should invest their money, because if that advice turns out to be bad advice the company will get blamed for it.

As a result, most people will have to speak to a financial advisor on how best to invest their money, or research the matter themselves to see what their available options are.

A Long Term Investment

Unlike other investments which you may be able to draw upon in a few years, a 401k pension plan is a long term investment and as such should be treated accordingly.

Although you can take your money out of a pension plan before you retire, it is generally not recommended to do so since you will have to pay a considerable fee.

Therefore a pension plan should be viewed in a similar way to other long term investments, such as investing in the stock market.

There will be ups and downs which you should ride out and stick with your investment for the long term, only drawing upon it when you retire.

However, people are now starting to question this once long held view as a result of the recent global economic crisis.

Are Pension Plans Really A Safe Bet For The Future?

Since many western countries are now heavily in debt (and some believe on the verge of a total collapse), people are now starting to fear that their 401k pensions will not be available to them when they retire.

So this is something you must take into consideration and research in more detail for yourself if you are just about to start a pension plan.

For those who have already been saving a 401k pension for many years, some financial experts recommend paying the fee, taking your money out of that plan and investing it elsewhere, such as in precious metals like gold.

The advantage of doing this would be to protect the value of your money, should the value of your currency decline so much that it essentially becomes worthless.

Tax Incentives

Despite the recent concerns regarding pension plans, many people still choose to take out 401k pension plans and carry on contributing towards them. One of the main reasons for this is due to tax incentives.

Money which is withdrawn from your pay check that goes towards your pension plan, is done so pre-tax. This means that you are not taxed on what you put in (although you may be charged other types of local tax).

Secondly, the money you add to your pension plan is also tax-deferred. This means you don’t have to pay any tax on it, or the interest you earn on it, until you withdraw it when you retire.