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Retirement and Pension Plans

Retirement is when a person stops working and retires from his/her regular job. Typically there is
a pre-defined retirement age for employees, after reaching that age employees have to retire from
the job. Also, the employees may opt for voluntary retirement, before the pre-defined retirement age.

Pension is a regular amount that a person usually receives from his/her employer post retirement. The
pension funds might be set up by the employers, government or other institutions such as trade unions
etc. The pension plans are typically taken care of by the employer, wherein the employer contributes a
certain amount and certain amount is deducted from your salary. This amount is invested by the employer
in long term financial instruments to generate returns that will support the post retirement pension
of the employee. The employee starts receiving the benefits of pension post retirement, wherein he/she
receives monthly payout of pension, which helps the individual in sustaining maintenance expenses.

Only 20% or so employees receive pension, and most private companies donít offer pension. Such employees,
who do not have benefit of pension, can secure their future by investing into retirement plans. Retirement
plans, such as 401k, allows individuals to put aside a regular amount from their pre-tax income into the
retirement funds. The funds are managed by financial institutions that specialize in fund management. They
invest these funds across various asset classes and markets in largely long term instruments to generate
return on the capital, to ensure that returns beat inflation and generate some return over and above inflation.
These funds help an individual save money for the post retirement needs, even if his/her employer doesnít offer
pension. Some employers though do not offer pension, but they contribute to your retirement fund as well. The
primary difference between pension and retirement plans is that the funds for pension plans are primarily
contributed by the employer, whereas the funds for retirement plans are largely contributed by an individual.


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