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A pension is an employer-sponsored retirement plan that provides employees with income after retiring. It is funded through contributions from both the employee and employer and is typically paid out in monthly amounts. Understanding pensions helps clarify the difference between defined benefit and defined contribution plans.
Explanation:
Understanding Pensions
A pension is best defined as an employer-sponsored retirement plan for employees. This plan is designed to provide employees with a stable income after they retire, based on their earnings and the duration of their employment with the company.
Pensions are funded by contributions from both the employee and the employer during the employee's working years and are typically paid out in monthly installments once the employee reaches retirement age. For example, if a person works for a company for 30 years, contributing to a defined benefit pension plan, they might receive a fixed monthly payment after retirement based on a formula that considers their years of service and salary.
Generally, pensions are a type of defined benefit plan, whereas other retirement savings options, like a 401(k), are often classified as defined contribution plans. In a defined contribution plan, the retirement benefit is based on the amount contributed and the performance of the investment.
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