These plans are sometimes offered to employees of state and local governments.
Deferred retirement options plans are offered to employees who continue working past normal retirement age and want to retire rich. In most cases, the employee would stop accruing benefits under the defined benefit plan (a plan that provides a retirement benefit based on the employee's earnings, age and tenure with the government). The deferred retirement option plan creates another retirement pot whereby the employer contributes money to the employee's retirement account separate from the defined benefit plan. These amounts are not actuarial determined and may be a fixed annual amount.
Suppose that Sue is covered by a defined benefit retirement plan which provides that she will receive an annual benefit beginning at retirement of 3 % of average final compensation times years of service (this is a typical defined benefit formula). Suppose further that the retirement plan permits Sue to retire as early as age 60 with 30 years of service. If Sue had average final compensation of $20,000 a year at age 60, and had achieved twenty years of service at that point, she could retire immediately with a benefit of 3% x 20 (years of service) x $20,000, = $12,000 annual retirement benefit from the defined benefit plan. If her employer offers the defined retirement option plan, she could continue working and the her employer would freeze her benefit from the defined benefit plan at $12,000 annually but also contribute $12,000 for each addiitonal year, for up to five years, that Sue works to her new plan.
That's the basic working of a defined retirement option plan but they may have other features. For example, in some instances a COLA or a "thirteenth check" (an additional payment each year equal to one month's benefits) will be applied to the basic benefit. In some instances, the employer and/or the member will make additional contributions to the account over the period of continued employment. The methods for crediting interest vary widely: earnings may be credited at a "formula rate" (e.g. the funding rate for the plan), at a fixed rate set forth in the plan, based on an independent index (e.g., T-bill rates), at a rate which depends on the discretion of the employer or some other party, or based on actual earnings . In some instances, the member can obtain the benefit only by foregoing the right to continued employment at the end of the defined retirement option plan period.
State and local governments offer deferred option retirement plans in order to retain valued employees past retirement age and as a way to not add additional obligations to their defined benefit plan funding burden. Because for many years defeined benefit plans were designed to get employees to retire early, they are poor mechanisms for getting employees to stay. Thus the defined retirement option plan. Employees like the plans because it enables those employees who may have "maxed out" on the benefit payable under a defined benefit plan to continue to accrue benefits. Even for those who have not maxed out, the rate of accrual is often more favorable than continued accrual under the defined benefit arrangement. In many instances, the defined retirement option plan benefit is payable as a lump sum, while the defined benefit is available only as a lifetime annuity.
For other ideas on increasing retirement benefits, visit the retirement planning center of this site.
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I never heqrd of thie plan before. Sounds like only govermnet or state workers. Most other retirement plans would just keep adding to original plan.
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I never knew that state employers could set up another retirement plan. Sounds like they can retire with more money than they make working. I know they need to keep some of them but i did not know they had 2 retirement plans since they maxed out thier pension.
I never knew they had another retirment plan besides thier pension. I know some state employees retire after so many years collect pension and work for another part of the state so they get 2 pensions. Most people have to work until they can collect social security but stte employees get to retire early and get 2 retirements. I now know why taxes are so high in some states. The goverment should allow regular people to have mutiple retirement accounts if they allow this.
I think they do not need this plan anymore. Some states started to make employes work to 62 now to retire. They should make it the same age as everyone else . I see why some people make more when they retire now than when they worked bewteen thier pension and deferred plans.
I do not see why people can set up another retirement plan, it is a personnal and individual choice, that is if they can afford it!
I think they need a plan right now ..
Retirements options plan are good to the employees because their provides the benefits that the plan have..
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It's part of every company policy to do that kind of strategy in a way that can help these employees once they retire. Thus, that retirement plan is a share between employees and his/her employer. It's actually a part of benefit.
Oh, thanks a lot for that information. My father is soon retiring and will be needing this one.
Of course in the UK we are losing all of your defined benefit pension schemes. We've been told that it is due to the aging population, but it seems a little curious that the large companies started reducing their defined benefits after incurring an aggregate £8billion deficit in funding. At the same time that Gordon Brown as chancellor increased the tax on pension funds by £8billion per year!
So we will not have the pleasure of defined benefit pensions for much longer.
As a result many people are using rental income from property to suppliment their retirement plans. Our mortgage calculator is used by many as a first step in working out if this is an option for them.