- Defined benefit (DB) pension plans
- Defined contribution (DC) pension plans
Their names seem to have much in common, but they are very different.
A DB plan considers your “years of service” (meaning the number of years you’ve worked) and your income history to provide you with your pension income. This calculated pension amount will be consistently paid to you starting at a specific age until death.
In comparison, a DC plan establishes the amount of money both you and your employer have put into the plan during your working years and provides you with a balance. In retirement, you’ll draw your income from that balance. The amount of income withdrawn from your plan will depend on how much was contributed, for how long, what the market conditions are, and how well the plan is managed.
Because you’ve been a part of a teachers plan, you are likely looking at a defined benefit plan; however, it is important for you to check your documents or reach out to each of your plan providers to confirm.
Is there a penalty for withdrawing your pension early?
There is no real “penalty” for accessing your pension early. But the sooner you access the funds, the less you will receive.
With a DB plan, your retirement income is based on an equation that includes years of service as well as average income. In situations where both those variables go up with time, withdrawing early means you will be locking in a lower income amount.
With a DC plan, the earlier you withdraw the funds, the less time the investments have to grow, and once you have accessed the plan, you can no longer contribute to it. So you will either have a smaller annual retirement income, or it will not last as long.
The fine print and pension-specific limitations
Pensions are a unique savings vehicle, and there are rules and regulations around accessing them. When you leave an organization (either for another opportunity or for retirement) you will have to make decisions in regards to the pension plan you have there. The pension option package is typically sent to you after 30 days of your departure. Usually your options are:
