Although any sound retirement plan rests on building a diverse portfolio of investments to fund retirement years, retirement benefits also are a key part of most Americans' retirement plan. Retirement benefits, also known as pensions, are continued cash payments made to beneficiaries after they stop working. Although most workers qualify for Social Security retirement benefits, public sector employees also may receive pensions from other public sources, and many private employers provide retirement plans as part of their compensation plans.
Social Security Retirement Benefits
Ninety-six percent of workers in America receive Social Security retirement benefits when they reach retirement age. Payroll taxes fund Social Security's general fund, and pension amounts are based on how much money a worker earned during his lifetime, although contributed funds aren't earmarked for a specific worker by the Social Security Administration. As of 2011, contributors reach full retirement age between age 65 and 67 – 67 for everyone born after 1960 – although retirees may elect to retire as early as age 62 and receive a smaller pension.
Public Employee Pensions
Some workers, such as federal employees, and municipal workers such as firefighters and police officers receive retirement benefits in addition, or in some cases, substituting for, Social Security retirement benefits. Although public pension plans vary widely by the agency, many public employees are eligible for retirement after 20 years of service, although retirement benefit amounts may increase with each additional year of service. For example, the armed forces' retirement plan allows troops to retire after 20 years of service and receive 40 percent to 50 percent of their final salaries; troops who retire after 40 years of service earn receive 75 percent of their final pay.
Defined Benefit Plan
Many private employers offer retirement benefits as part of their compensation plans. Defined benefit plans are a broad category of plan that guarantees retired employees a fixed amount upon retirement. Employers and employees may contribute to pension plan funds, and when an employee reaches qualifying retirement age and quits his job, he begins drawing his retirement pension based upon terms outlined by the plan. Employees who receive defined benefit plans can develop retirement budgets based on the reliability of their pension amounts.
Defined Contribution Plan
Other employers offer employees retirement benefits based on defined contribution plans. As part of these plans, employees and, in many cases, employers, contribute funds to individual retirement accounts. These funds aren't placed in a general retirement pool; they are earmarked for each retiree's use upon retirement. Because the funds are often placed in accounts linked to market performance or based on stock purchases, such a mutual funds, the final benefit amount is difficult to predict. These plans may outperform typical defined benefit plans during periods of market growth, but may under-perform during market contraction, so timing a retirement to fit market forces is essential for all holders of defined contribution plans.