You’re 65 years old, you’ve been working since you were 18 years old and it’s time to call it a day. Who wants to work forever? Retire while you still have the energy, health and will to travel the world and check off all the items on your bucket list. But, wait a second. How are you going to afford all of this? Do you have retirement account? if so, what kind do you have?

Before you mosey off to Easy Street, let’s talk about funding your retirement. Do you have a retirement account? Do you know what kind it is? Do you know how it will work? There are generally two types of employer-sponsored retirement accounts: pensions and 401K/403B. They are very different and before you retire, you should know what you’ve got.

Pensions are defined as “a regular payment made during a person’s retirement from an investment fund to which that person or their employer has contributed during their working life.” It is not a cash account like a 401K, but rather a defined benefit plan.  A “defined–benefit plan” is a retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of each of its employees. The defined-benefit plan places restrictions that control when and how each employee can withdraw these funds without penalties. In contrast, a 401K is a “defined contribution plan”. A succinct definition posted by http://time.com/money/collection-post/2791222/difference-between-defined-benefit-plan-and-defined-contribution-plan/ sums it up:

A defined benefit plan, most often known as a pension, is a retirement account for which your employer ponies up all the money and promises you a set payout when you retire. A defined contribution plan, like a 401(k) or 403(b), requires you to put in your own money.

            Pensions come with additional benefits such as cost of living adjustments, pre-retirement death benefits and post-retirement survivor benefits. 401K and 403B don’t. Pensions are often paid out over the life of the plan participant, but end upon their death. If you aren’t careful, a 401K or 403B could be exhausted a lot earlier than that.

More importantly, how much of the retirement account to you get to keep? Well, if you aren’t divorced, probably all of it, but if you are divorced, probably not so much. It is not uncommon for retirement accounts accumulated during the marriage to be distributed in the Final Judgment of Divorce or Property Settlement Agreement. This is because a retirement account acquired during the marriage (even if it began prior to the marriage and a component is pre-marital) is generally considered an asset and subject to distribution. (There are, of course, exceptions to every rule and perhaps you kept your retirement accounts in tact in exchange for something else. This article deals with accounts that are distributed).

Typically, a Final Judgment of Divorce or Property/Marital Settlement Agreement will account for the distribution of the retirement account with language such as “the parties agree that the marital coverture portion of the retirement account [pension, 401K, 403B, etc] shall be equally distributed between the parties and the marital coverture portion shall be calculated from the date of marriage to the date of complaint.” What does that mean? It means that 50% of the retirement account acquired during the marriage will be paid to the spouse once you retire.

So before you decide to pull the pin and retire to a life on Easy Street, be sure what you are doing and how much you will have to fund that new lifestyle. It may not be as much as you thought after all.