Passive Income Opportunities – Part 5 - Pension Plans

There are two general types of pension plans:

• Defined Benefit, and
• Defined Contribution.

Defined Benefit Pension plans are fast disappearing from corporate America and are being replaced with defined contribution plans such as cash balance plans, 401Ks, and profit sharing plans. These deposit a certain percentage of the salary directly to the employee’s 401K-plan account. The primary difference between these plans is that a defined contribution plan has individual accounts while a defined benefit plan does not.

Pension plans provide passive income during retirement. With defined benefit plans, the actual payment received monthly during retirement is predefined as it is based on a plan dependent formula. Social Security is an example of such a plan. With defined contribution plans, the monthly income realization at retirement is not automatic, but is an option – essentially what you are left with is a cash balance against which an annuity can be purchased to realize passive income.

The one big downside with pension plans is that in general one can start realizing this income to its full potential only after reaching retirement age.


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Last Updated: 06/2011.