Defining retirement plans

Q: Can you explain “defined contribution” and “defined benefit” retirement plans? — K.W., Ashland, Ky.

A: Sure. Some examples will make it clear: A pension is a defined benefit plan, because the amount you’ll receive from it in retirement is generally a known, fixed number. A 401(k) or 403(b) plan, on the other hand, is a defined contribution plan, because you know how much you (and perhaps your employer) put into it, while the amount you’ll eventually end up receiving is not so certain.

Employers bear more responsibility with defined benefit plans, as they need to accumulate funds sufficient to meet their future obligations. Over the past few decades, many companies have phased out pensions and phased in defined contribution plans. Workers now bear most of the risk, and they need to be sure to contribute enough to their retirement accounts —- and invest that money effectively — so they can support themselves in retirement.

For practical guidance about 401(k) plans and other retirement issues, visit Fool.com/retirement — and check out our “Rule Your Retirement” service at Fool.com/services.

Q: Is buying renters insurance smart? — P.R., Las Cruces, N.M.

A: Yes! It can protect you against theft or damage to your belongings and offer some personal liability protection. It’s generally affordable, too, often costing just a few hundred dollars per year.

Don’t assume your landlord will cover you, because his or her insurance will probably just protect the building itself and not your property in it.

You’ll need to specify how much coverage you want when you buy a policy. Some policies cover only the depreciated value of items stolen or damaged, while others cover the full replacement cost; favor the latter.