Making a Pension Investment

A regular pension plan is a retirement plan that is offered through a business.  More often than not, you aren't going to have a lot of choices in your pension plan.  Your employer may give you a few options, but most employers only offer a dozen or so choices.  This isn't all bad though.  Some studies show that providing too many options in retirement plans often scare employees and keep them from making sound choices.  So the limited choices you have aren't likely to expand any time soon.

So what option should you choose?  Almost every plan offers a money market fund.  Often, it is the default choice for employees who don't actively choose another option.  Unfortunately, for the long haul, it's about the worst option you can make!  Yes, in a down market it's the "safe" bet, but in regular market, it's a losing bet.  The interest you earn doesn't even keep pace with inflation.  The net effect is that you lost money. 

Typically plans will offer a several mutual funds ranging from an all bond mutual fund to an all stock mutual fund.  Usually there will be several funds in between there that have varying ratios of stocks to bonds in them.  Occasionally they will offer an international stock fund as well.  A few plans will offer company stock. 

The younger you are the more time is on your side.  That usually means that you should choose a stock fund.  It may have more ups and downs in the short term, but over the long haul, it has traditionally been the best performer by far.  Of course, past performance is no guarantee of future performance, but over the last 100 years and more, stocks have outperformed every other asset class there is.  In any given year that could change around, but we're talking long term.  After all, this is your retirement!

As you get older, you lose some of the benefits of time, but that doesn't necessarily mean you should make a run for safety and ignore anything else!  What it does mean is that you have to be more careful of the volatility in the market.  If you are getting ready to retire, and the market has a bad year or two, it will put a dent in your retirement funds just as you are ready to use them.  Because of that possible scenario, many people approaching retirement make a gradual shift from stocks to bonds.  Whether that is the right approach for you isn't an easy answer.  A lot depends on your personal feelings towards risk and volatility.  It will probably also depend on how much money you will have available to you at retirement. 

As long as you can stomach the volatility in the market, try to keep as much of your portfolio in the stock funds.  You should fare better in the long run.  Company stock isn't necessarily a bad option, especially if you get a price break or a matching contribution from your employer.  But while it usually is fine to choose one mutual fund for your pension plan, you should probably never have more than 10 - 25% of your pension portfolio in company stock.  Under no circumstances should you have the majority of your retirement money in your company stock!

Whether or not you have many choices, it is still usually a good idea to contribute regularly to your pension plan if that's an option.  For many Americans, the only retirement savings they have is through the plan their employer provides.  If that's your case, make the most of it!


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