What is a pension? Ask people in a final-salary scheme and they will talk in terms of their potential income: two-thirds of their pay after 40 years of work, for example. But members of a de-fined-contribution (dc) scheme tend to focus on the size of their pension pot-$100,000, say. That muddled thinking explains why many people in dc schemes may end up with a disappointing standard of living in retirement. For a start, total contributions to DC schemes, from employers and employees, are much lower than those made to final-salary plans. That implies dc pensions will be lower than final-salary ones. Secondly, workers seem to overestimate the income they can draw from a given pot of money (to put it another way, they underestimate the pot they need in order to generate a given income.)
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