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How pensions work
Colloquially
speaking, pensions are retirement plans that result in employees
receiving a fixed amount of money from their former employers during
retirement, often for life (although the technical legal definition
of pensions is significantly more
nuanced).
Unlike “defined
contribution plans” like 401(k) plans, “defined benefit plans” like
pensions make it so the employer, rather than
the employee, determines how much money is set aside for the
plan and how it’s invested (often in stocks, bonds, and other
assets). In retirement, monthly payouts include both the principal
and investment earnings. Employers often use factors including salary
and tenure to calculate investment amounts.
Derived from the
Latin word for “payment,” pensions were the most common type of
retirement plan in the US until the mid-1990s. 401(k) plans and
IRAs are now the most popular options—only about 20% of workers in
the US participate in pension plans today. There were roughly $69T
globally managed assets in pensions as of 2024.
Also, check out
...
> "Roman
military pensions" were among the first known pensions in
history. (Watch)
> Most pensions are subject to federal
income taxes. (Read)
> Was the
401(k) a mistake? (Listen)
> The US
states with the strongest pension plans. (View
Explore everything
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