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What Is a Pension?

Learn about pensions in this Howcast finance video with expert Gregory McGraime.


You may have access to a pension through your employer, and what a pension basically is, is a guarantee from your employer to pay you a certain amount of monthly income when you retire for the rest of your life. So that's terrific! I mean, it's hard to save enough money on your own for retirement but this type of employer benefit really can help you meat your retirement goals. So how does it work? Basically, based on the number of years, that you worked there, your age or salary, a whole bunch of different things, your employer is going to determine what kind of benefit you're going to get. So let me give you an example: let's say I make 15.000 dollars a year from my job and I'm getting ready to retire. But I've been there a long time and my employer, based on their pension agreement will say: "you know what? We'll going to pay you a pension when you retire. We're going to pay you 20.000 dollar per year for the rest of your life." So certainly, it's not what I was making but it's a big component of my retirement income when compared with my own saving and maybe some money from social security that can help me live at the standard of living I was used to in retirement. Now, there's two big decisions people have to make with the pension. Number one: you have to decide when are you going to start collecting it. Sometimes there's a range of ages when your eligible to collect the pension and if you collect it early that's good because you're getting the money sooner but you're usually getting a smaller benefit amount, and that's not going to change. The other decision you have to make is what type of pension option you want to choose. If I'm getting 20.000 dollar a year in pension for the rest of my life what happens if I pass away two weeks after I retire. Is all that money wasted? Can any of that money go to my wife, my children or other beneficiary? So sometimes there are a variety of pension options that you can choose from with fancy sounding names like 15% or 75% or 100% survival options and all that really means that you're making a decision. Do I want more money today for income and I leave less to somebody else or am I willing to take a little less income to provide some protection for family members of other beneficiary. Keep in mind, most pensions have gone away from a lot of employees during thought economic times for companies and other government organizations. But if you still have a pension you want to make sure you evaluate where that falls into your overall retirement plan and that you make those decisions I talked about in a way that makes the most amount of sense for your situation.

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