THE BLOG
07/30/2015 05:20 pm ET Updated Jul 30, 2016

The No. 1 Mistake People Make With Their Retirement Benefits

By Paula Pant

You've been planning your retirement for decades. Your last day of work is just a few months or years away, and you're ready to sit back and enjoy whatever it is retirement means to you -- traveling, catching up on favorite pastimes with loved ones or maybe simply sitting in your garden enjoying the feeling of not having to wake up to a blaring alarm clock.

Or perhaps you're 5 to 10 years from retirement and you're feeling overwhelmed by all the terminology, rules and regulations out there. You've read books and educated yourself, but you're haunted by the feeling that you may have overlooked something critical.

The sad truth is, even if you're a diligent saver all your life, you could be left high-and-dry come retirement because of one all-too-common mistake committed by people of all ages at all financial levels: Not fully understanding how your retirement benefits work.

It Takes a Lot More Than Knowing the Difference Between a 401(k) and an IRA

The world of retirement benefits is complex terrain, peppered with minefields like fine print, tricky terminology, little-known exceptions and seemingly random rules. And what you don't know can (and will) come back to bite you.

Here are just a few examples.

Did you know it's crucial to keep track of when you'll turn 70½?

If you own a Traditional IRA, you're subject to a little something known as a "required minimum distribution" or RMD. You must take this required minimum distribution from your IRA when you turn 70½, or else you'll be hit with a whopping 50 percent penalty. The first RMD can be delayed until April 1 following the year you turn 70 ½ and all future RMDs must be taken by December 31st. If you defer the first one until April 1 following the year you turn 70 ½, you have to take out two that year (the other by December 31st of that year). So if your RMD is $5,000 and you fail to mark your 70½th birthday on the calendar, you're looking at a penalty of $2,500 -- pretty harsh punishment for overlooking something most people are highly likely to miss.

Did you realize you can't necessarily depend on your benefit structure to remain as-is?

If your retirement savings plan hinges on your boss maintaining the status quo, you might face a nasty surprise.

If you belong to a "defined benefit plan," which is a plan that guarantees a specific monthly benefit at retirement (such as a pension), you might be shocked to learn that you can't depend on accruing benefits at your current pace. Your employer has the right to change the rate at which you earn future benefits (although they can't reduce the benefits you've already accumulated).

If your employer offers a "defined contribution plan," such as a 401(k), your employer is free to change its contribution structure anytime in the future. (Once again, though, they can't reduce the benefits you've already earned).

The takeaway? The future might not be the same as the past. Get ready for whatever may come your way.

Are you aware that taxes and fees could take a huge bite from your benefits?

When you quit your job, you have several options for how your retirement benefits may be distributed: you could collect a lump sum. You could roll over the balance to another retirement plan or to an IRA. If your balance is less than $5,000, your employer's plan can make an immediate distribution or rollover without your consent.

Each of these options comes with major tax repercussions, including potential penalties that could ultimately reduce the amount of money you have to live on during retirement.

In addition, each of these options has associated fees that could take a bite out of your retirement.

These are just some of the things you need to be aware of to make sure you're preparing for the happy retirement you envision. Luckily, navigating this complicated terrain doesn't have to be as difficult or scary as it sounds.

Be Prepared for Your Future

You don't need to be a financial whiz to understand how your benefits work, but it's essential that you're aware of the basics you need to have a grip on. To learn more about what mistakes to avoid, talk with a financial advisor, and be your own best advocate by searching information online, like the "7 Retirement Mistakes You Can't Afford to Make" eBook sourced for this post. With the right information, guidance and planning, you have the power to be your own retirement hero.