Understanding the Pension Protection Act and your retirement

In 2006, the Pension Protection Act was created. The goal was to provide economic security and set minimum funding standards and funding rules for employers using pension plans with their employees. This act, which was signed into law by former President George W. Bush, required companies that underfunded pension plans to pay higher premiums. Those premiums were sent to the Pension Benefit Guaranty Corporation, which then pays those entitled to pensions up to the maximum guaranteed by law when they retire at 65 years of age or older.

The PPA put into place elements that help many people prepare for retirement today. Those elements include automatic enrollment into defined contribution plans and other popular 401(k) features.

How did the Pension Protection Act affect retirement in the United States?

According to Vanguard, the number of firms automatically placing their workers in 401(k) plans rose from 10 percent in 2006 up to 41 percent in 2015. Of those plans, around 58 percent did offer automatic enrollment, which guaranteed participation.

At companies where employees are automatically placed into 401(k) plans, the statistics show that between 82 and 96 percent of workers participate. When enrollment is voluntary, the total number of people who chose to participate in a 401(k) dropped to between 29 and 85 percent. Most workers, when tallied, saved around 7.7 percent of their earnings each year, helping them guarantee themselves some security upon retirement.

The problem with pensions is that not every employer offers 401(k) plans. Coverage is a real issue, meaning that even though these plans exist, not every American has access. If there is no access, there is no way to save. Individuals could still save through Roth IRAs or MyRA accounts, for example, but the statistics show that workers save more and do better when automatically enrolled in a workplace plan or when saving through an employer.

Turning 65

Once you reach 65, you can begin to make withdrawals from your pension plan up to the maximum allowed by law. It's wise to look into the details of your pension plan and any withdrawals that you may make, as it could be something you need to address in your estate plan. You'll want to identify how much of an income you'll have and for how long you expect to maintain it in order to prepare for any illnesses or unexpected expenses that come up during your retirement.

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