Planning for retirement has become more and more complex over the years. It used to be that you worked until age 65 or so, retire and live off a pension and social security until you died about 10 years later. Now, many people have the ability to retire closer to age 60 and are living to age 90 or more. Along with that shift in retirement goals, many rules are now in place that have created retirement milestones that you need to be aware of so you can plan appropriately.
Here are the most important milestones to know about when planning your retirement:
Age 50: This is the age that you can start putting away even more money to your retirement plan. With “catch-up” contributions, workers 50 and older can contribute and additional $6,000 to their 401k or 403b plan. Those with SIMPLE IRAs can contribute an extra $3,000 and those with traditional or Roth IRAs can contribute an extra $1,000.
Age 55: If you’re 55 or older and you retire, quit or get laid off, you can take a withdrawal from your 401(k) in that same calendar year without having to pay the 10% early withdrawal penalty, but only from the account associated with the job you most recently left. This little known rule can be useful if you need money immediately after you leave your job and your retirement account is your only source for cash.
Age 59½: The 10% early withdrawal penalty on retirement account distributions goes away once you reach 59½. Keep in mind, though, that you’ll still have to pay income tax on traditional 401(k) and IRA withdrawals.
Age 62: You’re now eligible to take Social Security, albeit at a reduced amount from your payment when you reach your normal retirement age, which is 67 if you were born after 1959.
Age 65: You’ll become eligible for Medicare at 65 and can sign up as early as three months before your 65th birthday. There’s a downside if you don’t sign up on time: Your Medicare Part B and D premiums could permanently increase, and you could be denied supplemental coverage. If you expect to keep working, talk to someone in human resources about how this affects your group health plan.
Age 66: If you were born between 1943 and 1954, you’re eligible to take full Social Security payments when you turn 66, your normal retirement age. Those born between 1955 and 1959 will have to wait a few months longer. If you postpone collecting your payments, they’ll continue to increase by 8% every year you wait until age 70.
Age 67: If you were born in 1960 or later, this is your normal retirement age and will be eligible for full Social Security payments.
Age 70: If you haven’t started taking your Social Security payments, do it now. There’s no more benefit in waiting past age 70.
Age 70½: Distributions from traditional IRAs and 401(k) accounts become required after age 70½, and you must pay income tax on each withdrawal. These are known as required minimum distributions, or RMDs. If you fail to withdraw the correct amount, the tax penalty is steep: 50% of the amount you should have withdrawn. These are not applicable for Roth IRAs. However, RMDs are required by the beneficiary after you die.
Age 85: If you don’t want to pay taxes on RMDs at age 70½ or don’t need RMDs for
income until later, you have the option of deferring a portion of your RMDs as late as
age 85 with a qualifying longevity annuity contract (QLAC). A QLAC is a special
type of qualified deferred income annuity that guarantees lifetime income but
gives the flexibility to delay receiving payments until up to age 85. You can’t put more than $130,000 into a QLAC.
Please let me know if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
