Retirement is the status of a worker who has stopped working. This usually happens upon reaching a determined age, when physical conditions don't allow the person to work any more (by illness or accident), or even for personal choice (usually in the presence of an adequate pension). The retirement with a pension is considered a right of the worker in many societies, and hard ideological, social, cultural and political battles have been fought for this right to be granted. In many western countries this right is mentioned in national constitutions.
In most countries, the idea of a fixed retirement age is of recent origin, being introduced during the 19th and 20th centuries - before then, the absence of pension arrangements meant that most workers had to continue to work until death, or rely on the support of family or friends. Nowadays most developed nations have systems to provide pensions on retirement in old age, which may be sponsored by employers or the state. In many poorer countries, support for the old is still mainly provided through the family.
The retirement age varies from country to country but it is generally between 55 and 70. In some countries this age is different for male and females. Sometimes certain jobs, the most dangerous or fatiguing ones in particular, have an earlier retirement age.
Retired workers then support themselves either through superannuation or pensions. In most cases the money is provided by the government, but sometimes granted only by private subscriptions to mutual funds. In this latter case, subscriptions might be compulsory or voluntary. In some countries an additional "bonus" is granted una tantum (once only) in proportion to the years of work and the average wages; this is usually provided by the employer.
The financial weight of provision of pensions on a government's budget is often heavy and is the reason for political debates about the retirement age. The state might be interested in a later retirement age for economic reasons.
The cost of health care in retirement is large, because people tend to be ill more frequently in later life. Increasing numbers of older people, combined with an increase in the cost of healthcare, has led to the funding of post-retirement health care becoming a political issue. There is then pressure to reform healthcare systems to contain costs, or find new sources of funding.
Retirement might coincide with important life changes; a retired worker might move to a new location, for example a specialised retirement village, thereby having less frequent contact with their previous social context.
In some countries, retired workers will continue to participate in the life of their family and their society, often following ancient ethnic roles. Some countries are sponsoring initiatives to help retired workers keep contributing to social and cultural life.
Outside a retirement homeMany people in the later years of their lives, due to failing health, require assistance, the highest degree of assistance - in some countries - being provided in a nursing home. Those who need care, but are not in need of constant assistance, may choose to live in a retirement home. This is a facility giving the retired person some degree of freedom, yet with close-by medical assistance to handle emergencies.
Retirement ceases if the retiree decides to go back to work. Typically, retirees who go back to work are people who find the lack of activity boring and work mainly for their own amusement, often turning a hobby into a job. Old-age pensions are usually not reduced because of other income, so the latter comes on top of the former. This may be different in the case of a disability pension.
A retirement plan is an arrangement to provide people with an income, or pension, during retirement, when they are no longer earning a steady income from employment. Retirement plans may be set up by employers, insurance companies, the governement or other institutions such as employer associations or trade unions. Retirement plans are more commonly known as pension schemes in the UK and Ireland and superannuation plans in Australia.
Types of retirement plans
Retirement plans may be classified as defined benefit or defined contribution according to how the benefits are determined. A defined benefit plan guarantees a certain payout after retirement, according to a fixed formula which usually depends on the member's salary and the number of years' membership of the plan. In a defined contribution plan, the payout is dependent upon the amount of money contributed, and the performance of the investment vehicles utilized.
Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution schemes.
Defined benefit plans
Traditionally, retirement plans have been administered by institutions which exist specifically for that purpose, by large businesses, or, for government workers, by the government itself. A traditional form of defined benefit plan is the final salary plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the accrual rate.
Defined benefit plans may also be of the cash balance type with or without a formula that specifies an exact benefit at retirement in this way, whatever amount is accumulated can be available as a monthly pension at retirement or a lump sum at retirement and possibly before.
In addition, many countries offer state-sponsored retirement benefits, beyond those provided by employers, which are funded by payroll or other taxes. In the U.S., this is one role of Social Security.
Defined benefit plans may be either funded or unfunded. In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an actuary. In many countries, such as the USA, the UK and Australia, most private defined benefit plans are funded, because governments there provide tax incentives to funded plans.
In an unfunded plan, no funds are set aside. The benefits to be paid are met immediately by contributions to the plan. Most government run retirement plans, such as the social security system in the USA and most European countries, are unfunded, with benefits being paid directly out of current taxes and social security contributions. In some countries, such as Germany, Austria and Sweden, company run retirement plans are often unfunded.
Defined contribution plans
In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, often through the purchase of an annuity which provides a regular income. Defined contribution plans have become more widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of DB plans in the US has been steadily declining, as more and more employers see the large pension contributions as a large expense that they can avoid by disbanding the plan and instead offering a defined contribution plan.
Examples of defined contribution plans in the USA include Individual Retirement Accounts (IRAs) and 401(k) plans. In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined mutual funds to selecting individual stocks (or other securities). Most self-directed retirement plans are characterized by certain tax advantages, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain age--typically the year the employee reaches 59.5 years old--(with a small number of exceptions) without incurring a substantial penalty.
Money contributed can either be from employee salary deferral or from employer contributions or matching. Defined contribution plans are subject to IRS limits on how much can be contributed, known as the section 415 limit. The total deferral amount including the employee and employer contribution is the lesser of $40,000 or 100% of compensation. The employee only amount is $13,000 for 2004 with a $3,000 catch up. These amounts increases in 2005 and 2006.
Contrasting types of retirement plans
Advocates of defined contribution plans point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not posses the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts. This debate parallels the discussion currently going on in the U.S., where many Republican leaders favor transforming the Social Security system, at least in part, to a self-directed investment plan.
Another difference is that a defined contribution plan's assets remain with the employeee, even if he or she transfers to a new job or decides to retire early, whereas in many countries defined benefit pension benefits are typically lost if the worker fails to serve the requisite number of years with the same company. Self-directed accounts from one employer may usually be 'rolled-over' to another employer's account or converted from one type of account to another in these cases.
