As we grow older and approach retirement, many of us start to think about ways to secure our financial future. And two of the most popular options to do this are through Social Security and pensions. While both are means to guarantee a stream of income, they differ in several ways. We’ll differentiate Social Security and pensions and evaluate which one is better for you.
What is Social Security?
Social Security is a government-funded program designed to provide retirement income for eligible seniors. All working Americans pay into social security. This program is funded by payroll taxes and is available to individuals who have worked and paid into the system for at least ten years. Social Security payments are calculated based on your average earnings over the course of your career.
Benefits of Social Security:
There are several benefits to relying on Social Security for retirement income. Firstly, the program is managed by the government, so there is no risk of market fluctuations. This means your payments are fairly stable and are not affected by the performance of the stock markets. Secondly, Social Security benefits are adjusted annually to keep up with inflation. Lastly, Social Security benefits are guaranteed for life, which ensures you’ll have a regular stream of income even as you grow older.
What makes someone eligible to receive Social Security?
In order to start receiving Social Security, you must earn at least 40 credits during your working career. You can earn up to 4 per year, which is why you must work for at least 10 years. Then you must be at least 62 to start drawing benefits, however, it will be less than if you wait until reaching your full retirement age.
What are pensions?
Pensions are retirement plans offered by employers that provide income to retired employees in addition to their Social Security benefits. Pensions are set up to help employees save for retirement and are funded by both the employee and employer. They are calculated based on a formula that takes into account factors like your salary and the length of time you worked for the company.
Benefits of Pensions:
The main benefit of a pension is that it provides regular income during retirement. Unlike Social Security benefits, pensions are not subject to the lows and highs of the stock market. Pensions provide a predictable income stream upon retirement, which eliminates stress about finances during retirement. Additionally, some employers contribute to pensions, which means the balance in your account could grow significantly over time.
What makes someone eligible to receive Pension Benefits?
If your employer offers a defined benefit plan, it could be possible to start earning right away or after a certain length of time being employed. Each pension plan can have different eligibility and timing requirements.
In The End:
If you qualify for one or both, they can be very important factors for income planning. Often times these are not enough income on their own and people also rely on additional income from accounts such as 401ks, IRAs, and Roth distributions from investments accounts and annuities.
Source: Investopedia
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. Please consult your certified financial advisor.