Let’s face it: we all grow old some day. And when we do, we want to keep living in the same way we have become used to. Which means we need some sort of income. The standard way this desire is met, is by using a pension plan. However, did you know that most people with a pension plan will never see all of that money?
The 2 type of pension plans
There are basically 2 types of pension plans that you can enter into. In the most fashionable pension plan today (we’ll call this Pension Plan A), this is the deal:
- You add amount X to the pension every month
- The pension plan then invests your money
- At the end of your working life, you have a huge amount Y
The idea behind this plan is that you can enormously benefit from compound interest. The second pension plan type (let’s call it Pension Plan B) is different:
- You add amount X to the pension every month
- The pension plan invests your money
- At the end of your working life, you get amount Z every month for as long as you live
Most of it is the same. But the huge difference is in the end. With Pension Plan A you have a big amount of cash to do with as you please. With Pension Plan B you have an amount per month and that’s it.
Pension Plan A: The Good
Obviously, having a huge amount of money is a good thing. So the good thing is, that the potential of this pension plan, when started at a young age, is very good.
Pension Plan A: The Bad
The bad thing, which has happened to millions of people world wide the last few years, is when the money isn’t enough. For example, if you have an investment of $ 1.000 because you have just started with your pension plan, losing 50% of it due to a rocky stock market isn’t a big thing. The stock market will pick up and you have ample time to get your money back.
If you have $100.000 in there and you are at the end of your career, losing 50% of that money due to a rocky stock market means you’ll have to work longer because you’ve just lost half of your nest egg!
The second bad thing is that you have to use this money over an unknown period of time. It can be 1 year until you die, or it can be 40… Hard to determine how to spend your cash huh?
Pension Plan B: The Bad
Well, the only really bad thing about this is that it isn’t sexy. It is old-school, boring and won’t give you a chance of scoring insane amounts of money.
Pension Plan B: The Good
The good thing is obviously that it is relatively safe. Let’s face it, if the world economy plummets, no pension plan will likely stand the test. But all in all, Pension Plan B is good security. And most people are building a pension to provide themselves with security after their working days are over.
Conclusion
Know which pension plan you want. If you go for plan A, know the risks. If you go for plan B, know it ain’t nothing sexy. But know the details of the plan you choose, and what can go wrong with it. I would also advice to sit down with your pension planner at least every 2 years, but better yet every year. Discuss with him the performance of your pension and assess whether the choice you made back when you started your pension plan, is still worth it today.
Sun, May 9, 2010
Becoming Successful