Financial Literacy - Retirement income planning
7 retirement account mishaps that cost big

Because there is no required minimum distribution in a Roth IRA, waiting to take withdrawals is easier than with a traditional IRA, which comes with a deadline of age 70½ for distributions. (See next section.)

Many studies have been conducted to determine the safest withdrawal rate for most retirees. One study, the Trinity Study from Trinity University in San Antonio, Texas, found that withdrawing more than 5 percent of the portfolio per year could lead to depletion of principal if payouts last more than 15 years.

Retirees have a few choices. On the one hand, they shouldn't lower their standard of living more than necessary. But they can avoid running out of money before their time is up by spending less, going back to work, extracting income from real estate, buying an annuity or winning the lottery.

Planning how much to take out and how to invest the rest is a complicated process. A financial planner that specializes in retirement income can help.

Messing up RMDs

The flip side to delaying distributions: Waiting until age 70½ to begin taking distributions from a traditional IRA or 401(k) can push retirees into a higher tax bracket.

And some retirees get tripped up because of the loophole that allows them to defer taking RMDs at all in the first year.

"Required minimum distributions are only necessary when you hit 70½ years old and a lot of people don't understand what that means. The 70½ rule means that I have to start calculating my required minimum distributions in the year that I turn 70½. So if I turn 70½ in 2010, then my RMD is going to be calculated based on that year," says Stancil.

But people don't have to take it that year; they can wait until sometime before April 1 of the following year to take it, Stancil explains. But if they do that, they'll have to take two distributions that year.

"The problem with that is that it can force you into a higher tax bracket on all your money," he says.

Retirees should plan ahead for the RMD and understand the impact it will have on their taxes so they don't end up paying more than they should.

Also, be aware that a new law waives the required minimum distribution for the 2009 tax year only, due to the market bloodbath that adversely affected the retirement accounts of many retirees.

Blindly relying on target date funds

Most people are not financial experts and many have no interest in acquiring the knowledge and skill set to become one. For nonexperts thrust into the world of investing, target date funds are inherently attractive, offering complete diversification and requiring little or no thought.

These investments do bear some scrutiny, however. In the recent market downturn, investors near retirement age found that some funds, even those with imminent target dates, lost a lot of their value.

"You have no control over how aggressive or conservative that fund is. The policy is set by the fund management company," says Mary Ellen McCarthy, a founder and principal of Responsible Investing in Brookline, Mass.

"What we've seen over the last crisis is that many of these target funds were set up in such a way that they were run much too aggressively and suffered quite devastating losses," she says.

These funds may also have high expenses, which lower their total return. Investors should make sure they're comfortable with the fund's asset allocation, and find out how much the convenience of one-fund-investing costs.

Letting old accounts languish

Workers are likely to have multiple careers in their lives, and that means multiple 401(k) accounts.

Instead of leaving them with a former employer to collect dust, workers should strongly consider rolling their accounts via trustee-to-trustee transfer into a rollover IRA. Investors have the benefits of consolidating accounts and they can recreate the investments they held with the employer without losing track of their money -- or worse fates.

"One client's former company merged with another company, and the SEC came in and froze all the assets of the company. The client could not get their money for seven years," says Julie Murphy Casserly, CFP, and author of "The Emotion behind Money: Building Wealth from the Inside Out."

"I just think from an individual basis, it positions people very badly to have that extra risk exposure. You left that employer for a reason. Why do you want to keep your life savings there?" she says.

You wouldn't break up with a significant other and leave all your worldly possessions with him or her. Likewise, when your career takes you somewhere new, pack up your 401(k) and take it with you.

Money in a rollover IRA usually can be transferred into a new employer-sponsored plan. It's something to consider if your next job has a great 401(k) plan with low-cost fund offerings.

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