Understanding Your Loved One's Pension Options
Learn how to make smart choices about the pension for a secure retirement for your loved one.
The pension decisions for the older adult you care for will significantly shape their retirement income for years to come. We know there's a lot for caregivers to consider – from how your loved one will receive their money to when payments should begin. We're here to help make these choices clearer for you.
We'll help you understand:
- The basic types of pensions
- How to protect a surviving spouse/partner through pension choices
- Whether your loved one should take monthly payments or one big payment
- When to start the pension payments
- How the pension affects their taxes
Understanding Pensions
A pension is money an older adult receives from their employer after they retire. It provides regular payments for the rest of their life. Today, about one in three Americans over 65 gets money from a pension. However, fewer companies offer pensions now than in the past. Only about 15% of private company workers can get a pension today, down from 88% in 1975.
A good retirement plan for the older adult you care for typically has three main parts: their pension, Social Security, and their personal savings. Social Security alone isn't enough - it only covers about 40% of what most people earned while working. Most retirees need 70-80% of their old income to live comfortably. That's why having a pension and savings is so important.
Their pension helps fill the gap between Social Security and what they need to live well in retirement. When helping them choose how to receive their pension, it's crucial to think carefully. Most pension choices are final - they can't be changed later. Their choice affects both their and your family's financial future.
It's important for you, as a caregiver, to understand their pension options before they retire. When they start taking their pension matters a lot. If they retire early, they might get 5-7% less money each month. If they wait longer to retire, they could get more money.
Their pension money is protected by law. The Employee Retirement Income Security Act (ERISA) sets rules that pension plans must follow. For extra safety, many private company pensions are backed by insurance from the Pension Benefit Guaranty Corporation (PBGC). This means their money is safe even if their company has problems.
When looking at their pension choices, consider:
- How long they might live and their health
- What your spouse or other beneficiaries need if something happens to them
- Other money they'll have in retirement
- Whether their payments will go up with inflation
- How taxes will affect their payments
Types of Pension Plans
There are two main ways employers can help an older adult save for retirement. Each type works differently and has its own benefits for them.
Defined Benefit (DB) Plans
This is what most people think of as a traditional pension. The employer promises to pay the older adult a set amount of money each month after they retire. The amount they get is based on how long they worked and how much they earned. The employer is responsible for making sure there's enough money to pay their pension.
- They get a guaranteed monthly payment for life
- Their payment is based on their years of work and salary
- Their payments might increase with the cost of living
- The employer handles all the investments
- They usually needed to stay with one employer for many years
- They couldn't choose how the money was invested
Defined Contribution (DC) Plans
These plans, like 401(k)s, work more like a savings account. The older adult (and often their employer) put money into their personal retirement account. The amount they'll have when they retire depends on how much was saved and how well their investments perform. They are in charge of managing this money for their retirement.
- Common types are 401(k)s and similar workplace savings plans
- The employer might add some money when they contribute
- They can choose their investments
- They could take this account with them to a new job
- Their family can inherit what's left in their account
- They could borrow money if they needed it
- Their success depends on how much they saved and invested
Traditional pensions (DB plans) give an older adult more security but are harder to find nowadays. Retirement savings plans (DC plans) give them more control but require more decisions on their part. Most people today rely on a mix of workplace savings plans, Social Security, and personal savings for retirement.
Private vs. Public Sector Pensions
Private Sector Pensions for Older Adults
Private companies have largely shifted away from traditional pensions towards 401(k) plans over the past four decades. Today, only about 1 in 7 private sector workers had access to a traditional pension, a significant drop from nearly 9 in 10 in the 1970s. Most companies now primarily offer 401(k) plans, often matching a percentage (typically 3-6%) of what employees saved.
For the few remaining private sector pensions, older adults usually needed to complete 5 years of work before benefits began. Their benefit amount would depend on how long they worked and what they earned. Many companies have phased out these pensions for new hires. To protect individuals and their families, a government agency called the PBGC (Pension Benefit Guaranty Corporation) insures these pension benefits up to certain limits, which can be an important safeguard to consider.
Public Sector Pensions for Older Adults
Most government jobs continue to offer traditional pensions. Approximately 9 out of 10 state and local government workers had access to these plans. These pensions tend to be more generous than those found in the private sector. After a full career, many public sector workers may be eligible to receive 60-80% of their working salary in retirement, compared to typical private sector pensions which often provide only 20-40%.
Public pensions frequently include yearly cost-of-living adjustments (COLAs) to help benefits keep pace with inflation. They also often provide survivor benefits for family members and coverage if the older adult became disabled. They typically needed to work 5-10 years to qualify. For each year they worked, they earned 1.5-2.5% of their salary as pension. However, it's worth noting that many public pension systems are facing financial challenges in saving enough money to cover future benefit payments.
Military Pensions for Older Adults
Military members can receive a pension after serving for 20 years. The amount of the pension depends on their rank and the total time they served. Under the current system (known as BRS - Blended Retirement System), service members receive 2% of their base pay for each year served. This means after 20 years, they would receive 40% of their base pay for life.
Military pensions typically increase each year to match inflation, helping to preserve their purchasing power over time. They also provide benefits for family members after death, an important consideration for caregivers. Some veterans may be eligible to receive both pension and disability payments. Additionally, military members often received matching funds in their retirement savings account (TSP - Thrift Savings Plan). Extra benefits may also be available for those who were injured in combat, providing further support for veterans and their families.
Understanding the Older Adult's Basic Pension Option: Payment for Their Lifetime
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What Is It?
This pension option gives the older adult a set amount of money each month for as long as they live. The payments stop when they pass away. They'll get higher monthly payments with this choice compared to other options because it only covers their lifetime. The amount they receive depends on their age when they retire, how long they worked, and how much they earned. For example, they might get 1.5% of their average salary for each year they worked.
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What's Good About It?
The older adult gets more money each month while they're alive. Their payments will be about 20-30% higher than if they chose an option that covers both them and their spouse. This extra money can help them delay taking Social Security or save their other retirement money longer. Since they get the same amount each month, it's easier to plan their spending. Some plans also increase their payments each year to keep up with rising costs.
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What to Watch Out For
Once the older adult passes away, the payments stop completely. No one else gets this pension — not their spouse, children, or other family members. This can be risky if their spouse relies on this pension income. It can be especially hard if the older adult passes away early in retirement and their spouse needs money for many years after. They also can't leave any pension money to their children or family members. Some people worry that if the older adult passes away soon after retiring, they won't get much benefit from their years of pension contributions.
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Who Should Choose This?
This option works best if the older adult is single or if their spouse has their own good income. It's a smart choice if their spouse has their own pension or retirement savings. It can also work well if they have life insurance to protect their spouse, or if they have other savings like IRAs or investment accounts their spouse can use. This might also be right if their children are financially stable and don't need to inherit this pension.
Pension Payout Options: Joint-and-Survivor Annuity for the Older Adult You Care For
As a caregiver, understanding pension payout options for the older adult you support is crucial. Let's look at the Joint-and-Survivor Annuity.
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Definition
This type of pension pays the older adult a set amount of money every month for their lifetime. After the older adult passes away, their spouse (or someone else they choose) continues to receive payments. If the older adult is married, this is usually the standard choice unless both they and their spouse agree to pick something else.
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Survivor Benefit
The older adult's spouse can receive 50%, 75%, or 100% of the monthly payment after the older adult passes away. The higher the percentage chosen for the spouse, the lower the older adult's initial monthly payments will be. For example, if the 100% option is chosen, the older adult's monthly payments might be 20-30% less than if a single-person plan were selected.
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Trade-off
The older adult's monthly payments will be lower because the plan needs to cover both their lifetime and their spouse's. If their spouse is much younger, the payments will be even lower because they'll likely receive benefits for a longer time. Consider all the older adult's income sources, such as Social Security and savings, when helping them make this choice.
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Advantages
The main benefit is knowing the older adult's spouse will have a steady income after the older adult is gone. This is especially important if their spouse doesn't have much other retirement money. The payments are guaranteed and won't change with stock market fluctuations. This option is particularly helpful if the older adult's spouse didn't work long enough to build up their own retirement savings.
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Key Considerations
As a caregiver, think about the spouse's age, health, and other financial resources when considering this option for the older adult. Decide if the spouse needs the full payment amount or if a smaller percentage would be sufficient. Some plans offer a bonus feature: if the spouse passes away first, the older adult's payments may increase. Remember, once this option is selected, it usually cannot be changed later.
It's a good idea for you, as the caregiver, to talk with a financial advisor to see if this pension option is right for the older adult and your family's overall financial planning.
Pension Payout Options: Getting Your Money All at Once
When the older adult you care for reaches retirement, you'll need to help them decide whether to get their pension money all at once or in monthly payments. This is a big choice that will affect their retirement, so it's important for you to think about what works best for them and your family's situation.
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What Is It?
Instead of receiving monthly pension payments, your loved one can choose to get all their pension money as one lump sum. This means their former employer will provide one large payment that you can help them put into a retirement account like an IRA.
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How It's Figured Out
The amount they receive is based on how much their future monthly payments would be worth today. Their age and current interest rates help determine this amount. When interest rates are low, they usually receive more money.
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Good Points
Receiving all their money at once means your loved one, with your support, is in charge of it. You can help them invest it as they wish, use it for large expenses, or save it to leave to their family. You also don't have to worry about their former employer having financial difficulties later. Plus, you can help them take out more or less money as needed.
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Things to Watch Out For
They won't receive guaranteed monthly payments anymore. You'll need to help manage the money carefully so it lasts their entire retirement. If it's invested poorly or too much is spent too quickly, your loved one might run out of money when they are older.
It's a good idea to talk to a financial advisor before choosing this option for your loved one. Think about how much other money they have saved, their Social Security payments, their comfort with investing (and your ability to help manage it), and what your spouse (if applicable) needs.
If the older adult takes all their money at once, you can help them avoid paying taxes right away by putting it directly into an IRA. This is called a rollover. If this isn't done, they'll have to pay a significant amount in taxes that year.
Other Ways to Get Your Loved One's Pension
Guaranteed Time Payments
This option pays the older adult for their lifetime, but also ensures that payments will continue for a set period, even if they pass away. For example, with a 10-year guarantee, if the older adult passes away after 5 years, their designated beneficiary (like you or another family member) will still receive payments for the remaining 5 years.
Mix of Cash and Monthly Payments
Your loved one can choose to receive a portion of their pension as a one-time lump sum cash payment, and then get smaller monthly checks for the rest of their life. This can provide immediate funds for big expenses (such as home modifications or medical needs) while still ensuring a regular income stream.
Couples' Payment Plan (Joint-and-Survivor)
This plan is designed to ensure that the older adult's spouse (if applicable) continues to receive payments after the older adult passes away. The monthly amount received during both their lives is typically smaller because it's set up to cover two lives. You can help your loved one choose how much their spouse will receive – commonly half, three-quarters, or all of the original payment. This is a very common and often recommended choice for married individuals.
Social Security Bridge
With this option, the older adult receives larger pension checks before their Social Security benefits begin, and then smaller pension checks once Social Security starts. The goal is to help maintain a more consistent total monthly income throughout their retirement by combining both pension and Social Security payments.
Adjustable Couples' Plan
Similar to the regular couples' plan, this option has a special feature: if the older adult's spouse passes away first, the older adult's pension payments will increase. They start with lower payments than a standard couples' plan because of this potential increase, but it avoids paying for spousal protection that is no longer needed if the spouse is no longer living.
How Inflation Affects Your Loved One's Pension Over Time
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How Inflation Hurts Their Pension
As time passes, prices generally go up – this is called inflation. When prices rise but your loved one's pension payments stay the same, their money doesn't buy as much as it used to. For example, if inflation is 3% per year, after 20 years, their pension will only buy about half of what it could when they first started receiving payments. This is especially challenging because some costs, like healthcare, tend to rise even faster than general inflation. While overall prices might increase 2-3% each year, healthcare costs often jump 5-7% annually. As a caregiver, understanding this erosion of purchasing power is crucial for their long-term financial stability.
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Keeping Up With Rising Costs
Some pensions include regular increases designed to help your loved one keep up with rising prices. These increases are called Cost-of-Living Adjustments (COLAs). COLAs can work in different ways: some provide a fixed increase each year, some compound (like interest in a savings account), and some adjust based on actual inflation rates. Many pensions might limit these increases to 2-3% per year, and some only grant increases when the pension fund can afford to. When you're helping your loved one review their pension options, it's important to ask if COLAs are included and how they are calculated.
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Government vs. Private Company Pensions
It's important to note that pensions from government jobs usually offer better protection against rising prices than those from private companies. Approximately 8 out of 10 government pensions automatically increase payments over time. Private company pensions, however, rarely offer these increases, meaning the amount your loved one starts with is typically what they'll receive for life. For federal government workers, the level of inflation protection depends on when they were hired – older plans often provide full protection, while newer plans may offer only partial protection.
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Protecting Their Money From Inflation
If your loved one's pension doesn't automatically increase with inflation, you'll need to explore other strategies to help them maintain their purchasing power as costs rise. This might involve looking into investments that tend to grow faster than inflation, such as stocks or real estate. Another option could be to consider delaying Social Security (which *does* increase with inflation) or exploring special government bonds designed to protect against inflation. Many older adults also choose to work part-time to supplement their income as their living expenses increase.
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Planning For the Long Term
Given that people are living longer, your loved one's pension might need to last 25-30 years or even more. As a caregiver, helping them plan for this extended period is vital. One approach is to choose a higher starting pension payment, if available, and use some of that extra money to proactively purchase additional protection against inflation. Another strategy is to set up different sources of retirement income that begin at various times, helping to spread out their financial resources and protect against rising costs. Remember to regularly review your loved one's retirement plan with them to ensure it continues to meet their evolving needs.
How Pensions Are Taxed for the Older Adult You Care For
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Federal Tax Basics
Most pension money an older adult receives is taxed as regular income. This means they'll pay taxes at their normal tax rate, just like they did with their paycheck. If they already paid taxes on some of their pension contributions, part of their payments won't be taxed again. Most retirees pay between 22% and 24% in federal taxes on their pension, though this depends on how much total income they have from all sources. As a caregiver, understanding this can help you anticipate their financial situation.
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Receiving the Money: Monthly vs. All at Once
The older adult can receive their pension as regular monthly payments or as one big payment. With monthly payments, taxes are paid bit by bit, which usually keeps their tax rate lower. If they take all the money at once (called a lump sum) and don't put it into another retirement account, they'll pay taxes on all of it that year. This could mean the older adult paying a much higher tax rate. For example, receiving $500,000 at once might mean paying 35% in taxes, while receiving $50,000 yearly might mean paying only 22%. Also, if the older adult is younger than 59½, they might have to pay an extra 10% penalty if they take a lump sum. As a caregiver, you'll want to discuss these implications carefully with them.
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State Taxes
Different states tax pensions differently. Some states tax all pension income, while others don't tax it at all. For example, the older adult won't pay state taxes on their pension if they live in Pennsylvania, but they will if they live in California. Some states, like Michigan, let them avoid taxes on part of their pension, especially as they get older. States like Illinois, Mississippi, and Nevada don't tax pensions at all. As a caregiver, it's important to know how the older adult's state handles pension taxes, especially if they are considering moving after retirement.
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Ways to Help the Older Adult Save on Taxes
There are several ways to help the older adult reduce their pension taxes. They can move their money directly into an IRA, carefully time when they start taking their pension, or plan around their required withdrawals. It helps to talk with a tax expert who can suggest ways to lower their taxes, such as giving to charity or deducting medical costs for the older adult. Remember that their pension income might affect how much tax they pay on Social Security and could change their Medicare costs. As a caregiver, you play a key role in helping them explore these options.
How to Mix an Older Adult's Pension Income with Other Retirement Money
A good retirement plan for an older adult brings together money from different places. As a caregiver, you need to think about both their current needs and their future financial security.
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Multiple Income Sources
Help them draw money from their pensions, Social Security, and personal savings
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Smart Social Security Timing
Consider when they should start their pension and Social Security payments
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Investment Balance
Use their steady pension money as a base for other investments
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Planning for the Long Term
Ensure their money lasts and protects their spouse/partner
Having multiple sources of retirement income makes their plan stronger. When you help them combine money from their pensions, Social Security, and their own savings, you create a more stable retirement income for them. This protects them if one source of money has problems and gives them more flexibility in managing their finances.
Considering when the older adult should start getting Social Security along with their pension needs careful planning. Waiting to take Social Security can give them bigger monthly payments, while pension timing might work better differently. Understanding how these two work together can make a big difference in their total retirement income.
Think of their pension as the steady foundation of their retirement money. Since you know this money will come in regularly, they (or you, on their behalf) can take more calculated risks with their other investments. This might help their money grow more over time while their pension provides stability.
Planning for a long life is important, as people are living longer these days. Consider how their pension choice affects both the older adult's and their spouse's/partner's financial future. Choosing a pension that pays their spouse/partner after they pass away typically means lower monthly payments now, but it helps protect their spouse's/partner's future. Look at this choice along with their other savings and insurance plans.
Helping Your Loved One Make a Smart Pension Choice
Helping an older adult choose their pension payout is a big decision that will affect their retirement. Here are key steps to help you guide them in making the right choice.
Gather Their Information
Ask their pension plan for all the important documents. Get clear numbers for each payment option they offer. This includes how much they would get monthly for a single person plan, how much for a plan that covers their spouse, or if they take all the money at once.
Consider Their Personal Needs
Think about their health and how long they might live. Consider what their spouse would need if they pass away first. Look at all their money sources, like Social Security and savings. Think about the lifestyle they want in retirement and whether they need steady payments or more flexibility.
Compare the Choices
Look at each payment option side by side. Figure out which choice gives them the best value over time. Think about whether they need protection against rising prices. Consider how each option works with their other retirement money to support their needs.
Consult an Expert
Meet with a financial advisor who knows about pensions. Ask them to show you how different choices would work out for your loved one over time. Understand how taxes would affect each option. If you're unsure, it's okay to get a second opinion.
Make the Choice
Help them pick the option that fits their needs best and turn in the forms early. Read everything carefully before they sign. Keep copies of all their paperwork. Make sure you know when forms are due. If they're taking a lump sum, ensure their new account is ready to receive the money.
Remember: Once this choice is made, it typically can't be changed later. Take your time to understand everything, since your loved one's pension might need to last for many years.
Important Questions to Ask When Helping an Older Adult Choose Their Pension
Will this choice provide enough income for the older adult's retirement?
When considering the pension options for the older adult you're caring for, think about whether they will have enough money to last their whole retirement. A pension that pays them every month for life helps ensure they won't run out of money, which is especially important if they, or their spouse, might live a long time. Look at all their money sources, such as Social Security and savings. Help them make a list of their basic expenses, potential health costs, and desired activities. Remember that while monthly payments are reliable, they might not keep up with rising prices over time.
What happens to their family if the older adult passes away first?
This is a very important consideration if the older adult is married. If they choose payments just for their life or decide to take all the money at once, make sure their spouse will have enough to live on without the older adult's pension. If not, picking an option that pays their spouse after they pass away might be a better choice. Consider their spouse's age, health, ability to work, and any other income sources they have. While the older adult might receive less money each month if they choose to protect their spouse, it provides crucial security. They can usually choose how much their spouse will get (50%, 75%, or 100%) – help them pick what works best for their specific situation.
How will taxes affect their pension choice?
Understand how much tax the older adult will pay on monthly pension payments versus taking all the money at once. If they take the full amount, ensure there's a plan to move it to a retirement account. Remember that their choice can affect their Social Security taxes and Medicare costs. Different states have different pension tax rules, so relocating could change how much money they keep. If they take all the money at once and are under 59½, they might pay extra taxes. Consider consulting a tax expert to understand how each choice affects their taxes.
Is the older adult's pension plan financially healthy?
For private company pensions, check if the plan has enough money. For government pensions, look at how stable the employer is. While the older adult's health and needs matter more, this information could help you advise them if they are unsure. Check if their benefits are protected by government insurance (PBGC) and how much they cover. You can look at the plan's yearly reports to learn about its financial health. For government pensions, see how well the state or city manages its money.
Will rising prices affect the older adult's pension over time?
Most pension payments stay the same amount, which means they buy less as prices go up. Check if the older adult's pension includes raises to match rising prices. If not, think about how their other savings can help cover higher costs. When prices go up just 3% each year, their pension might only buy half as much after 20 years. Consider advising them to have different types of retirement income that can grow as prices rise.
Should the older adult take part of their pension as a lump sum?
Some plans allow them to take some money now and get smaller monthly payments later. This gives them both guaranteed income and money they can use right away. Think about whether this helps them meet goals like paying off debt, saving for emergencies, or leaving money to their family. Consider if they are good at managing investments or if they need help from an expert. Remember they can't change their mind later, so help them think carefully about what's best long-term.
Common Mistakes to Avoid
Rushing the Decision
Don't make a quick choice for your loved one without looking at all their options. Take 3-6 months to study their choices carefully. Talk to financial advisors and your family about what's best for them. This decision will affect their finances for many years, so it's worth taking your time to ensure the best outcome.
Forgetting About Rising Costs
Remember that prices go up over time. A payment that seems good for your loved one now might not be enough in 20 years. What covers their bills at age 65 may fall short by age 85. Look for options that grow with inflation, or make a plan to help them deal with rising costs.
Not Protecting Their Spouse
Think about how the chosen option affects your loved one's spouse's future. Don't just pick the highest payment that benefits only your loved one. Their spouse may live 20-30 years longer, often with higher medical bills. While single-life benefits pay more now, they could leave the surviving spouse struggling later.
Expecting Too Much from Investments
Be careful about advising your loved one to take a lump sum to invest. The stock market goes up and down, and fees can eat into returns. Even professional investors can't guarantee they'll do better than a steady pension payment. Think about how much risk you and your loved one are willing to take with their money.
Key Steps to Make the Most of the Older Adult's Pension
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The older adult's pension plays a big role in their retirement income. It can provide 40-60% of the money they'll need in retirement. This makes it just as important as Social Security and any personal savings they may have. When you, as a caregiver, understand how these different income sources work together, you can help build a better retirement plan for them.
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As a caregiver, take an active role in managing the older adult's pension. Learn about their pension plan's rules and options. Use tools like pension calculators to explore different choices on their behalf. Ask for help from experts when you need it. Seek out workshops or resources related to managing pensions for others. Meet regularly with their plan administrator. Keep copies of all their pension paperwork and any letters about their benefits.
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Choose pension options carefully to protect the older adult's future. Think about their spouse's needs (if applicable), their health, and their other retirement income. Many retirees do best with a mix of pension payments, Social Security, and savings. Look at how different pension choices might affect their taxes. Take time to understand how each option would work for their family.
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The older adult worked hard for their retirement – now you can help them make good choices to enjoy it. Keep up with any changes to their pension plan. Review their retirement plans regularly. Be ready to make changes if their needs change. Remember that planning for retirement doesn't stop once a pension option is chosen. Continue watching their overall finances and adjust plans when needed.