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Key tips to consider if choosing a lump-sum pension payout

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Your pension plan may give you the option of taking your full pension in a lump sum when you retire. When you choose a lump-sum payout instead of a monthly pension payment, you replace a lifetime monthly payment for a one-time payout. A lump-sum payout can give you the flexibility of choosing where to invest or save your money, and when and how much money to withdraw. However, it also shifts responsibility from your employer to you for making your money last and protecting it from a variety of risks ranging from inflation to fraud.

Here are things to know and do if you have the option of taking out a lump-sum payout on your pension:

Proceed with caution: This is a one-time choice. Consider your health, and your overall retirement income and needs. If you are married, consider the long-term financial well-being of your spouse.

Ask your employer or plan administrator for more specific information about your payout options and their requirements and deadlines. Ask if your plan may allow a combination of payouts.

Detect and correct errors in your lump sum calculation: Mistakes can happen. Many factors determine your lump -sum payment amount including your age, years of work, your earnings history, taxes withheld, and the terms of your plan.

Take a look at your most recent pension statement, and verify that the information used to calculate your lump sum matches.

Plan for tax consequences: You will pay taxes on your lump-sum payout. Your lump sum money is generally treated as ordinary income for that year. For this reason, your employer is required to withhold 20 percent on the amount.

In addition, you could pay a 10 percent early withdrawal penalty tax if you have not reached age 59½.

If you don’t need all the money immediately, consider rolling it over into a qualified retirement account within 60 days of taking the lump sum. A qualified retirement account will protect your money from an early withdrawal penalty and defer income taxes until you take money out.

Make your money last: You and your spouse may spend 20 or more years in retirement. For example, if you decide to invest or save your money the value of your lump sum can erode over time due to fees and commissions, poor stock market performance, and inflation.

Seek help from financial professionals as needed.

Protect your money from fraud and scams: Scammers and fraudsters often target older consumers. Be wary of anyone promising high investment returns and low risk, and pressuring you to act quickly.

Take your time. Verify information, ask questions, and seek advice from trusted professionals, family, and friends; this will help you spot a fraud or scam.

Plan ahead: Timing your retirement or separation date is the easiest way to maximize your payout options and the amount that you can get under each one of them.

Check out our guide to pension lump-sum payouts and your retirement security and learn more about your pension payout options.

Beware of Scams Targeting Older People During the Holidays

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Our Office for Older Americans is working to provide older consumers and their families with the tools and information they need to protect themselves from frauds and scams.

Scams that target older people occur every day, but you can count on scammers to ramp up their efforts to prey on people’s generosity during the holiday season. These grinches, armed with their dirty tricks, may even weave the holidays into elaborate stories to pull at your heartstrings as they slip their sticky fingers into your wallet.

During the holidays, the common scam known as the imposter or “grandparent scam” might be decorated with a special plea, a story of a relative in trouble who desperately needs money to fix a car or get out of jail – and home for the holidays.

The ruse known as the IRS scam takes on a vicious new twist with a grinch on the phone threatening an elder with being arrested and spending the holidays in jail for unpaid taxes or a fake debt. And then there is the predictable increase in false or imposter charities, which sound identical to the real ones. The pitch is wrapped in sympathy inducing requests for year-end, tax-deductible holiday donations. These grinches stand ready to take your credit card or check routing information and charge you for bogus Nutcracker ballet tickets, or a holiday charity fundraising event.

These scammers may even scour the internet and social media sites looking for a special connection to your life, such as a family member or community connection, to get you to trust them so you’ll be willing to part with your hard-earned money. Some will go to great lengths to sound like they know you, or worse, your elderly parents.

Here are a few tips:

  • Before offering your help to someone who claims to be a grandchild (or other relative/friend), be sure to telephone your family to verify that the emergency or urgent request is genuine.
    • Beware of a caller who insists on secrecy. Never allow anyone to discourage you from seeking information, verification, support and counsel from family members, friends or trusted advisers prior to making any financial transaction.
  • Take the following precautions to make sure your charitable donations benefit the people and organizations you want to help. If a caller claims to be from an established organization such as a hospital, charity, or law enforcement agency, look up the number of the organization independently and verify the claim before sending money.
    • Ask for detailed information about the charity, including name, address, and telephone number.
    • Then, call the charity directly. Ask if the organization is aware of the solicitation and has authorized the use of its name. The organization’s development staff should be able to help you.
  • If you have received a letter from the IRS stating that you owe taxes, call the IRS directly at 1-800-829-1040 for information.
    • The IRS will neither call to demand immediate payment, nor call without first mailing a bill. And, the IRS does not require you to use a specific payment method such as a prepaid debit card nor will they threaten you with arrest for not paying.

Share this information with your friends, parents and others in your community. For more information on identifying and preventing frauds and scams, check out Money Smart for Older Adults: Prevent Elder Financial Exploitation guide for consumers. In addition, the Consumer Financial Protection Bureau’s Office for Older Americans has produced materials that include Managing Someone Else’s Money Guides for financial caregivers. To find these materials and to learn more, go to consumerfinance.gov/older-americans. But most important, have a safe and happy holiday season!

This blog post was first published on the National Center for Elder Abuse website.

5 things to consider before you collect your Social Security benefits

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If you’re approaching retirement, you’re probably thinking about when to start collecting your Social Security retirement benefits.

To help you make a more informed decision about when to claim, we created a new tool called “Planning for Retirement”. You’ll see how your claiming age affects your benefits and get tips relevant to your situation, which can help you start the conversation about your retirement needs and goals. We encourage you to try it out!

In addition to using the tool, consider these five tips to help you plan ahead and make the best decision for yourself and your family:

1. Know your “full retirement age”

The age at which you get your full retirement benefits from Social Security ranges from 66 to 67 depending on the year you were born. Claiming before your full retirement age leads to a permanent decrease in monthly benefits, while claiming after leads to a permanent increase. The full retirement age is the age at which you can start working and collecting simultaneously without facing a reduction in benefits.

Did you know? One recent survey found that seven in ten consumers believe that 65 is their full retirement age. In fact, the full retirement age actually varies depending on the year in which they were born.

2. Don’t claim early if you don’t have to.

Allowing your benefits to grow for one year makes a difference in your benefits. You’ll get an additional five to eight percent in monthly benefits for every year you wait to claim after age 62, maxing out at age 70. A higher monthly benefit could be important when you are older, which is when Social Security may play a more central role in your retirement income. At that point, your other sources of income and savings may be depleted and your health-related costs may be higher.

Did you know? You could see as much as a 30 percent reduction in monthly benefits by claiming before your full retirement age; whereas you can get as much as a 32 percent permanent increase (8 percent per year) by claiming after your full retirement age – up to age 70.

3. Know your retirement budget

Start with a simple budget that accounts for your income and expenses. Consider both your actual income and expenses before retirement and your expected income and expenses after you retire. This can help you understand how a reduced or increased benefit will affect your ability to meet your needs in retirement. In addition, this kind of budgeting can help you decide if you should reduce your expenses and pay off any debts before retiring.

Did you know? Retirement years may be more expensive than retirees expect, as many will incur increased health and housing expenses in their later years, and many carry mortgages and other debts into retirement.

4. Keep working if you can

Staying in the workforce – full or part time – for even one or two additional years can earn you an even bigger increase in your Social Security benefit by replacing years with low or no earnings from your earnings record. Working longer also gives you more time to save for retirement.

Did you know? Many people (46%) believe that their benefits are based on how long they work as well as their pay during only the last five years of employment, when in fact they are based on their highest 35 years of earnings.

5. Consider your spouse’s long-term needs

Your decision of when to claim your Social Security benefits could affect the benefits your spouse will receive after you die. Because surviving spouses receive the higher of the two spouses’ benefits, it often makes sense for higher earning spouses to claim at or after their full retirement age to get their full or highest possible benefit. This can minimize the reduction in income a surviving spouse may experience. Talk to your spouse about your claiming options so you can make this important decision together.

Did you know? On average, a married couple reaching age 65 can expect that one spouse will outlive the other for about 10 years or more.

Do you need more information to help you decide when to claim Social Security? Before you claim, check out “Planning for Retirement”: www.consumerfinance.gov/retirement/

To get more facts about Social Security, check out our factsheet.

The Retirement Tool is also available in Spanish

Before you claim Social Security, explore our new Planning for Retirement tool

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There is a good chance that you or someone you know may benefit from our new “Planning for Retirement” tool, which we created to help consumers approaching retirement make an informed decision about when to claim their Social Security benefits.

Here are three reasons why you should check out “Planning for Retirement”.

1. See how the age at which you claim affects your Social Security retirement benefits

Over one-third of consumers claim their benefits at age 62, but your monthly payments can increase by as much as 75% if you wait and claim at age 70 instead of 62.

See your estimated benefits on an interactive graph and find out how to increase them.

If your expected monthly benefit at age 62 is $750, your expected monthly benefit at age 70 is $1320. Source: Social Security Administration

2. Make a better decision with information relevant to your situation

Everyone’s situation is different. Whether you’re married, planning on working in your 60s, or whether you have retirement savings can influence your decision of when to begin claiming your Social Security benefits. After using “Planning for Retirement,” we hope you’ll be able to make a more informed decision based on your situation.

3. Start the conversation about retirement and take action

Whether you find it easy or difficult to talk about money with your family, we provide a tool that can help you begin this conversation and think about the factors that matter when making this decision. It also shows simple action steps that will help you in your retirement planning journey.

Ready to get started? Check out “Planning for Retirement” today: www.consumerfinance.gov/retirement

And if you enjoy it, please share it!

For more about the importance of Social Security’s claiming age for your financial security, see our issue brief.

The Retirement Tool is also available in Spanish

Save the date, Washington, D.C.!

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Join us for an event about retirement planning with the Social Security Administration (SSA) at the Brookings Institution in Washington, D.C.

The event will take place on Thursday, November 12 at 10:00 a.m. EST. The event will be held at:

Brookings Institution
Saul/Zilkha Room
1775 Massachusetts Ave, N.W.
Washington, D.C. 20001

The event will feature remarks from Director Richard Cordray and Acting Commissioner of Social Security, Carolyn W. Colvin, followed by an expert panel discussion about retirement planning.

This event is open to the public, but limited space is available and an RSVP is required. You may RSVP at http://connect.brookings.edu/register-to-attend-america-retirement-plan.

If you need an accommodation to participate, you can make a request or email events@brookings.edu.

You can also follow along by watching a live streaming video. We will share a link to the streaming video before the event begins.

See you there!