Investments: Episode 43
It's Movember Day 16 and the Mo in fine form. Get your first glimpse of the pirate look in this episode.
Please stop by my Movember page and donate what you can.
Now that the mustache has spoken it's on to the show...
Cash Balance Pension Plan
Chad Northrup asked if I would share my thoughts on Cash Balance Pension plans. Great idea Chad!
Cash Balance Pensions are a relatively new retirement plan variants that are gaining some traction.
They are a form of a defined benefit plan. However, unlike a traditional DB plan which guarantees a certain amount of income during retirement. These plans guarantee a certain cash balance on a certain date.
Example: Instead of the company saying "you get $60K a year until you die." With a cash balance plan it's like they are saying "you’ll get $200K at age 65." Then you can annuitize that amount or take a lump sum.
Benefits of Cash Balance Pension plans:
- Employer takes on all the risk and makes all the contributions.
- They are protected by the Federal Govt.
- Consistent growth.
- Employer can contribute more per employee than defined contribution plans. Great if you are in a high compensation company.
Some Small Negatives of Cash Balance Pension plans:
- You may be able to accumulate more with a defined contribution plan.
- Likely rate of return will be low because the employer is guaranteeing it.
Remember, you still need to plan. Understand it the guaranteed cash balance will be enough to support your desired retirement lifestyle.