You should be planning for your retirement finances throughout your career, but even after you retire, you can't afford to stop paying attention to financial matters. If you don't keep track of some essential elements of your retirement finances, you can fall into traps that can devastate your prospects for a prosperous and financially secure retirement.
To help you avoid some of the worst mistakes that retirees make, we turned to three Motley Fool contributors to share their experiences about what you really need to keep track of after you retire. By paying close attention to these key areas, you can help ensure that your own retirement will stay on track for the rest of your life.
Sean Williams: You've heard it before, and you'll probably hear it many more times, but there may not be a tougher decision you'll make during retirement than when you'll claim your Social Security benefits.
Social Security is there for you in retirement to help replace, according to the Social Security Administration, about 40% of your income. This replacement percentage is around 55% for lower-income workers, and roughly 27% for the maximum earners.
However, when you claim benefits matters too. Laying claim to your benefits at age 62, when you're first eligible, will lop off about 25% of what you would have received while waiting for full retirement benefits. Wait as long as possible, until age 70, and your benefits rise 77% higher than they were had you claimed your Social Security benefits at age 62. It sounds like a no-brainer to wait until age 70 based on this explanation, but it's not always that simple.
Claiming benefits early allows for immediate access to income that lower-income workers may not be able to wait for.
Additionally, while it's not a pleasant thought, factoring in your health history or that of your family may come into play, too. The Social Security Administration designs its payouts based on the assumption that people will live to be about 78 years old. If you pass away before you hit 78, then taking benefits at 62 will net you the most cumulative money. Conversely, if you expect to live into your 80s, 90s, or even longer, waiting to claim Social Security benefits is likely a smarter move.
The good news is the SSA does allow for a "do-over" known as Form 521 within the first 12 months of claiming benefits. If you claim early and then regret your decision, you can pay your benefits received back and allow your benefits to continue to build once again.
Lastly, it's also important that retirees and pre-retirees factor in the possibility of a benefits cut at some point in the future. The Old-Age, Survivors and Disability Insurance Trust Fund is on pace to run out of its cash reserves by 2033, and if Congress does nothing a 23% benefits cut will be implemented to keep the system solvent. This possible cut is just one more reason to really weigh your options.
Brian Stoffel: If you've done your fair share of retirement research, you know about the 4% Rule: Withdraw 4% of your nest egg in year one of retirement, and adjust that figure for inflation every year thereafter. Many studies that back-test this approach say that it will ensure you don't run out of money in retirement.
There are, however, certain circumstances where even this conservative approach can land you in trouble. If, during the first five years of retirement, your nest egg suffers massive losses -- if you were invested in the Nasdaq in 2000, for example, or stocks in general before the Great Recession -- reducing the amount that you pull out could be in your best interest.
That's because when you sell your holdings for living expenses you are incurring losses that can never be recovered. And you're doing it at the worst time -- when the value of your holdings is at all time lows.
Dan Caplinger: One of the most complicated things to keep track of during retirement is the requirement to take minimum distributions from retirement accounts, such as traditional IRAs and 401(k)s. Throughout the beginning of your retired years, withdrawals from retirement accounts are voluntary, but once you turn 70 1/2, the IRS forces you to start taking money out of IRAs and 401(k)s or else pay a draconian 50% penalty on the amount you should have withdrawn.
What makes required minimum distributions from retirement accounts complicated is the calculation process. Each year you have to take the total amount of retirement assets as of Dec. 31 and then divide it by your life expectancy, as determined through a combination of an IRS mortality table and rules governing how to make the right calculation after the first year. In general, that means you'll have to take more out as you get older.
Also, retirement account RMDs are mandatory even if you don't actually need the money. Even if you simply put the money into savings, you'll pay taxes on the withdrawn amount, and for some retirees, those distributions are enough to kick you into a higher tax bracket. Nevertheless, the consequences of skipping a required minimum distribution are so bad that you'll want to bite the bullet and pay taxes, no matter how burdensome it may seem.