Social Security is the United States’ federal “Old Age, Survivors, and Disability Insurance” (OASDI) program. It’s overseen by the Social Security Administration. The program is complicated, but essentially, if someone has paid into the program for 10 years or more, they’re eligible to receive benefits starting at the age of 62. If a person chooses to defer their Social Security, though, they’re eligible to receive a higher monthly benefit. This means some people wait until 67 or even 70 before they begin drawing on Social Security. Everyone will have a different plan depending on their income needs and specific situation.

There are also options for survivors benefits and disability benefits available through Social Security to qualifying participants. The program—in effect since August 14, 1935—has changed over the years to continue to provide security for retirees. Because it’s an old program, and because the rules have been changed many times and grown in complexity, it is important you speak to a professional who could help you map out what you can expect from the program (as well as what you can’t count on). 

By the same token, if you don’t already know them, you might want to look into the differences between a defined-contribution plan—such as a 401(k)—and a defined-benefit pension plan. Pensions are rarer these days, but they do still exist. If you have a defined benefit pension, you need to understand how it works, and what the rules are as it relates to your retirement income plan. 

A defined-benefit pension plan, which we’ll call “pensions” from here forward, provides a specified payment amount. They are also employer-sponsored, which means the employer, not the employee, is responsible for the investment risks associated with the plan. For a defined-contribution plan, the employee is responsible.²

Because pensions are guaranteed by the employer, they require a complex administration, including insurance and actuarial projections; this has made them almost completely obsolete as employers move toward defined-contribution plans like 401(k)s.¹

Beyond these distinctions, defined benefit plans also have different ways that employees can receive their payments in retirement. There could be lump-sum payments or payments available over time. There is the U.S. federal government, which insures defined-benefit pensions; there are tax considerations and much more. 

A financial adviser might be able to help you navigate your pension if you have one as part of your retirement income plan.

1 | Julia Kagan, “Social Security,” Investopedia, accessed March 2, 2020, https://www.investopedia.com/terms/s/socialsecurity.asp.

2 | Lawrence Pines, “Understanding the Rules for Defined-Benefit Pension Plans,” Investopedia, accessed March 9, 2020, https://www.investopedia.com/articles/credit-loans-mortgages/090816/understanding-rules-defined-benefit-pension-plans.asp