MONEY MATTERS: Identifying the differences in a 401(k) and pension and which is right for you

Updated: Mar. 16, 2021 at 1:26 PM EDT
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COLUMBIA, S.C. (WIS) - Many employers offer their full-time employees a 401K or pension to aid in their retirement planning but what’s the difference between the two and is one better than the other?

John Bradley, a financial planner, and expert with Capital City Financial Partners, says pensions are not as popular as they used to be. Back in the day, people who had a pension and social security didn’t necessarily need to save as much money for retirement as people do now. A pension plan is usually contributed by your company 100%. Whenever someone with a pension retires, they have a promise to be paid by the company. With a 401k, the individual has to contribute to it. The company you work for will write you a match, but you must contribute a certain amount for that match. You can predict what you will get paid through your pension for the rest of your life, but with your 401k, that is a little more difficult to predict because of the rate of returns on your investments.

Which is better, Bradley says, depends on your mindset in retirement but both are valuable tools.

“If you prefer a guaranteed monthly check that you don’t have to worry about or think about a pension is great. If you like to have that flexibility of investing and growing money, a 401K may be best. If your employer offers a pension, I’d encourage everybody to at least build up some money in a 401(k) to provide some liquidity and if your employer doesn’t have a pension and you have a 401(k), you may want to talk to a financial professional about turning some of that 401(k) into your own pension so that you have a stream of guaranteed income coming in for retirement.”

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