How Does a Pension Work After Retirement?

Knowing how your pension works can help you plan your future retirement.
Knowing how your pension works can help you plan your future retirement.
Knowing how your pension works can help you plan your future retirement.

If you’re lucky enough to have worked the majority of your life for the same employer, you may be eligible to receive a pension from that employer when you retire. Though such retirement benefits are frequently overlooked by young employees just starting out, this benefit can add up to thousands and thousands of dollars when you reach retirement age. However, each company pension can vary. It’s wise to make sure that you understand the basic – and the specific – rules of your company’s retirement program. Here’s what you need to know about pensions.

They Are Taxable

Pension proceeds are taxable. The money you receive from your company pension is subject to state and federal income taxes. Although some municipalities waive income tax for retirees.

You Can Also Receive Social Security

You may be eligible to also receive Social Security benefits. Whether you can receive both a pension and Social Security benefits depends on the type of pension you are getting. Those who receive a federal government pension are not eligible for Social Security. However, if you receive a pension from a company in the private sector, you may be able to receive Social Security also, provided you meet the requirements for such payments.

Working While Collecting A Pension Can Be Tricky

You may or may not be able to work and still receive your pension. In general, you can work another job after retirement and still receive your company pension, though some pensions carry the restriction that you can’t work in the same industry.

Know The Formula

Most company pensions are calculated using a formula that takes into account both your years of service and the salary you have earned throughout your tenure with the company. To maximize your pension, it’s important to thoroughly understand this formula. Retiring a year before you become fully vested could cost you a considerable amount of money.

A Pension Is Not a 401k

While both a pension and a 401k program are company-sponsored retirement options, the similarity ends there. A 401k is individually owned (by you) and is tied to stock and bond performance. The money in a pension plan is owned by the company and although they may (and probably will) invest their money in the stock and commodity markets, they are still obligated to pay you whether the market rises or falls.

If you’re approaching retirement age and are eligible to receive a company pension, then you’re on your way to a more financially stable retirement. Make sure to learn as much as you can about your pension to maximize this valuable benefit before your last day.

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