While few Americans have pension plans, those who do need to take care to avoid some common mistakes with this important retirement tool.
A pension plan is a defined benefits plan in which the employer maintains the plan and agrees to make set payments to the employee in retirement, CNN Money said
. Retirees have some choices in pension plans at retirement. Those choices lead to some of the biggest pension mistakes people make.
1. Not Getting in Contact with Your Old Employer
Pension plans will not “follow” you when you leave a job. However, if you were at a company offering pension plans long enough to be vested, you should get back in contact with them at retirement. Most people who have stayed at a company at least five years will be 100 percent vested in their pension plan benefits, CNN Money said. However, you could be eligible for some benefit in as little as three years. The number of years at a company will determine your actual payments.
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2. Taking the Lump Sum
Taking pension benefits in a lump sum may mean you will outlive your retirement money, according to the Pension Benefit Guarantee Corporation
, which helps insure pensions in the United States. If you take the lump sum, you will have to be the one to manage the money. One of the biggest mistakes people make with lump sums from pensions is the poor investment of the funds.
3. Insufficient Annuity Payments
People in poor health may be making a mistake by taking the annuity option from their pension, PBGC said. The risk of the annuity option will be the possibility there will not be enough money to cover high medical bills. The plan could also leave survivors without a payment.
4. Errors in Calculation
Do not rely on the numbers being right. Some of the most common mistakes in pension payouts happen because the pension is not calculated correctly, according to the United States Department of Labor
. Remember to account for all income, including bonuses, commissions and overtime. Make sure your years of service are all considered, including any time spent working in a different division. It is also wise to double check the math yourself including the formula used to calculate benefits. Review your plan before you retire, and review the numbers regularly to make sure these mistakes do not happen.
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5. Personal Information is Incorrect
Many people forget to update changes in marital status, including the death of a spouse, the U.S. Department of Labor said. Some pension mistakes happen because the wrong Social Security, birthdates or other personal information is incorrect. Double check all of this information.
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