 TITLE: What Is the Difference Between a Pension and a 401(k)? CONTENT: An employer-sponsored pension gives you a fixed sum of money each month after retirement for as long as you're alive. That sum is based on how long you worked for that employer and what your salary was. The monthly benefit may, for instance, be $100. Or it may be an amount equal to 1% of your average salary during your final five years of employment multiplied by your total years of employment.\nAs of 2018, about 1 in 3 older adults received pension benefits, according to the Pension Rights Center. The median benefit ranged from $9,827 to $30,061 a year, depending on the type of pension.\nTo receive pension benefits, a retiree must have worked at an employer for a certain period of time so that their benefits are \"vested.\" In many cases, you're fully vested in your pension (and qualify for full benefits) if you've worked somewhere at least five or seven years. You may be partially vested (and qualify for partial benefits) if you haven't met the necessary threshold to become fully vested.\nEmployees are automatically enrolled when a pension plan is offered by an employer, whether it's a major corporation or a local government. Funding for a plan can come from the employer and the employee, with investment earnings adding value to the pension account over time. Earnings from pension account investments can fluctuate, however. For instance, Pew Charitable Trusts estimates that during the 2020 budget year, returns for the typical public pension fell 4 to 5 percentage points short of their targets. The good news? Unlike 401(k) accounts, pensions have a guaranteed monthly benefit amount, which will be unchanged by the effect market fluctuations have on the pension's financial performance.\nOther advantages of pensions include:\n*   Federal insurance backs most plans.\n*   No dependence on stock market performance once you've retired.\n*   Ability of an employer to contribute more to a pension plan than other types of retirement plans.\nAmong the disadvantages of pensions are:\n*   Lack of control over how the money is invested.\n*   Little flexibility in tapping into your pension before retirement if major expenses arise.\n*   No cost-of-living adjustments for many private pension benefits.\n*   Limited ability for pension benefits to be passed on to a retiree's heirs upon their death.\nAll or part of your pension benefits may be taxed by the federal government. Some states tax pension benefits, while others don't. If you withdraw money from a pension plan before age 59½, you may face a 10% tax penalty from the IRS; there are exceptions, however, such as if you become totally or partially disabled. END