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“7 Important Ages for Retirement Planning”

 

The amount of decisions and timeframes that arrive at your doorstep as you head into retirement can be overwhelming.  It’s hard to keep track of what age you become eligible for Medicare vs. when you can take social security vs. when you can pull from various accounts without incurring penalties.   To top it all off, legislation has a way of being updated just when you become comfortable with understanding these ages and we are forced to re-learn a new way of working.  Part of the work we take on with clients is to help guide them along the way as they make these timing decisions and to provide them with the proper analysis and objective thinking.  In this post, we break down seven of the most important ages to keep in mind as you prepare for and thrive in retirement.

 

Catch-Up Contributions at age 50

 

Beginning at age 50 you can ramp up your retirement account contributions. Employees age 50 and older can make 401(k) catch-up contributions of up to $6,500 for a maximum possible 401(k) contribution of $26,000 in 2021 ($19,500 plus the $6,500 catch up). Those age 50 and up can also deposit an extra $1,000 in an IRA, or $7,000 in total for 2021.

Making catch-up contributions allows older workers to tuck additional money into retirement accounts and qualify for a bigger tax deduction in the years leading up to retirement.  There has even been talk recently that new legislation called “Secure Act 2.0” would increase these catch-up amounts for ages 50 through 65 to ensure aging workers can save up as much as possible in their final earning years.

 

Penalty Free Withdrawal Age is 59 ½

 

Most workers have saved up the majority of their retirement savings into workplace retirement accounts (401K’s 403B’s etc..) and will roll these accounts over to Traditional IRA’s and Roth IRA’s according to the tax features of their workplace plans.  Once you reach age 59 ½ you can begin pulling money from these IRA accounts without incurring an early withdrawal penalty of 10%, Roth IRA’s will require that your account is at least five years old to withdraw without penalty.  Keep in mind that on Traditional IRA accounts even when you avoid the 10% early withdrawal penalty, you will still be subject to income taxes on the amount you withdraw in a given year.

 

Social Security becomes Available to you at 62

 

You can start collecting your Social Security payments at age 62. However, compared to your “full retirement age”, your monthly payments will be reduced by approximately 30% if you begin payments at this age.

Also, if you work after signing up for Social Security, your benefit checks could be temporarily withheld if you are paid more than the annual earnings limit.  If you retire before your full retirement age and continue to work and earn more than $18,960 per year, for every $2 above this amount, Social Security will reduce your benefit by $1.  Once you reach your full retirement age, your Social Security benefit will be recalculated to give you credit for the benefit withholding and your continued earnings.

 

You Become Medicare Eligible at age 65

 

You can first enroll in Medicare during a seven-month period that begins three months before the month you turn 65, includes the month you turn 65, and ends 3 months after turning 65. Take care to sign up on time, because your Medicare Part B premiums will increase by 10% for each 12-month period you were eligible for benefits but did not enroll. If you delay enrollment because you or your spouse is covered by a group health plan at work, sign up for Medicare within eight months of leaving the job or health plan to avoid the penalty.  Additionally, if you choose a Medicare supplemental coverage plan, an insurance company cannot deny you coverage based on pre-existing conditions as long as you sign up during the initial open-enrollment period.  After this open-enrollment period ends, you could be subject to medical underwriting.

 

Full Retirement Age is 66 for Most Baby Boomers (67 for Younger Generations)

 

People born between 1943 and 1954 qualify for their full Social Security benefit at age 66. The Social Security full retirement age gradually increases from 66 and two months to 66 and 10 months for those born between 1955 and 1959. For example, the full retirement age is 66 and six months for people born in 1957. Once you turn your full retirement age, you can work while receiving Social Security benefits without having any of your payments withheld.  For those born in 1960 or after, the full retirement age is 67.  Currently 67 is the oldest “full retirement age” and something considered to be an area that Congress may look to increase in the future if they are going to ensure that social security funding remains solvent in the coming decades.

 

Your Social Security Benefits are Maximized if you wait until 70

 

Social Security payments increase by 8% for each year you wait to start your payments between your full retirement age and age 70. After age 70, there is no additional benefit to waiting to sign up for Social Security.  For example, someone who is planning on a $3,000 per month full-retirement age benefit would see this increase to $3,779 if they waited to start claiming until age 70.

An important consideration here is life expectancy.  Marital status, family longevity history, and ultimately peace of mind are important factors to consider when deciding whether to claim at full-retirement age or wait longer for increased benefits.

 

Required Minimum Distributions from 401k’s and IRA’s begin at 72

 

Those over age 72 are typically required to take annual withdrawals from 401(k)s and traditional IRAs and pay the resulting income tax bill. The penalty for missing a required minimum distribution is a stiff 50% of the amount that should have been taken out.

Your first distribution must be taken by April 1 of the year after you turn 72. After that, annual withdrawals are due by Dec. 31 each year.   Qualified Charitable Distributions from an IRA directly to a qualifying charity can help to satisfy minimum distributions each year, but are currently limited to $100,000 per year.  An important point to keep in mind is that Roth IRA’s or Roth 401k’s are NEVER subjected to required minimum distributions, so pre-planning to shift some of your retirement funds to Roth accounts can be important before you reach age 72.