Pay As You Go Pension Plan

A “pay-as-you-go pension plan” is a pension plan that we pay into, um...as we go.

If that sounds simple, it is. In theory, anyway. It works like a 401(k): we tell our employer how much of our paycheck we want to contribute (or we contribute one lump sum amount every year), and it automatically goes into our pension plan. Then when we retire, boom—we’ve got a pension.

The part where it can get a little complicated is when we have to choose which type of pension plan we want to invest in. But if we work for a private company with a private pension plan, these are choices we’re probably going to have to make. It’s like investing in a mutual fund: do we want to be more aggressive, aiming for higher returns but risking greater losses? Or do we want to play it conservative and stick to a nice, comfortable predicted earnings rate? And what about when we retire: do we want to get everything we’re owed all at once, or do we want it to pay out over time, like an annuity?

Not all pay-as-you-go pension plans have this many options. In fact, sometimes there might be one option: here is the one pension plan, and if we want in, we sign up, and that’s it. But just as with any other investment, we should definitely make sure we know what we’re getting into before we...get into it.