If you work to make a living you should understand that at some point in your life you may no
longer be able to work. This can occur as a result of the natural aging process or even some
type of medical issue that arises. While you are still able to work and earn money you will want
to do what it takes to make sure that you are ready to retire when the time comes. One way of
doing this is by taking advantage of a defined-benefit plan provided by your employer.
Defined-benefit plan basics
When you are enrolled with a defined-benefit plan with your employer you are legally
guaranteed by the employer to receive a certain amount of financial benefits upon retirement
from the company. This can come in the form of annuity payments for life or a lump-sum payout,
depending upon the terms set forth by the defined-benefit retirement plan. The amount of
benefit you receive will be determined by a preset formula based upon particular metrics, such
as your salary and how long you have worked for your employer.
Your employer will be responsible for investing the funds of the retirement plan. Usually, an
employer will hire a third-party investment firm with the professional experience and knowledge
necessary to manage the funds and make appropriate investment decisions.
Generally, with a defined-benefit plan, you are not allowed to take out the funds whenever you
want, similar to a 401(k) plan.
How defined-benefit plans work
Defined-benefit plans are also known as pensions or qualified-benefit plans. This type of
retirement plan is different from other types of plans such as retirement savings accounts
because the payout you receive does not depend on the results of the investment decisions
made by your employer. Therefore, even if investments made with the plan’s funds sour, your
employer is still legally obligated to payout your defined amount of benefits. Essentially, your
employer is assuming all of the investment risk.
Usually, an employer will fund a defined-benefit plan by contributing a portion of your pay as an
employee into a tax-deferred account. Some plans also allow you as an employee to make
additional contributions. Essentially, the contributions to the defined-benefit plan are deferred
compensation for your work as an employee.
Most defined-benefit plans provide you with two options for payout: a lifetime annuity or a single
lump-sum payment. The annuity will provide you with a consistent income stream in the form of
monthly payments until you pass away. If your plan includes an option for a qualified joint and
survivor annuity, your spouse will be able to continue receiving monthly benefits even after your
death. The lump-sum option will pay out the total value of the retirement plan in one single
Working beyond retirement age
Although you may have reached the age where you are allowed to start receiving payments
from your defined-benefit plan provided by your employer, you may also want to consider
continuing to work for a bit longer. This can help increase the amount of your payout since the
length of time worked is longer. Also, it could increase your final salary that is used to calculate
the benefits you will receive. Additionally, the plan may stipulate that working past the normal
retirement age automatically increases your benefits.
Is a defined-benefit plan enough for retirement?
Whether your employer’s defined-benefit plan provides enough financial security for retirement
will depend on the specific rules of the plan that ultimately determines your payout. It may be
possible you need additional retirement accounts and investments to supplement your pension.
Speaking to a financial advisor can help you figure out what you need to do to maintain your
the desired quality of life during retirement.
The foregoing information has been obtained from sources considered to be reliable, but we do not
guarantee that it is accurate or complete. Any opinions are those of the author and not necessarily those
of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change
without notice. There is no guarantee that these statements, opinions or forecasts provided herein will
prove to be correct.