9 Important Ages To Consider Retirement Planning:
Thinking about the rest of your life — especially in terms of your finances — can be a scary but exhilarating proposition. Assuming it turns out to be as long of a time period as you would like it to be, thinking about it all at once can be daunting. However, breaking your life into nine stages can help you compartmentalize your retirement-planning process so you can take your goals one step at a time.
This Very Moment
The first important age in planning out your retirement is right now. Whatever age you are at this moment, regardless of how close you are to the transition, or how behind you might feel in your savings, there are definitive steps you can take to get organized and create a roadmap to where you want to go. What do you want the rest of your life to look like? Don’t know? Well, you might have an idea but it depends on a few scenarios that aren’t known yet. Maybe you will downsize and move wherever the grandchildren are, or maybe you will stay in the home and fix it up. Think of steps you can take that can serve you many different ways. Would paying the house off benefit your future in both of those scenarios? If so, perhaps that is a place to start. Look for other commonalities among your goals.
Turning 50 has its own issues, separate from retirement planning. But for many people it’s an attention-getter. You have now entered what the IRS bluntly calls the “catch up” phase of your saving career. Workers at this age or older can now defer taxes on as much as $24,000 in 401(k) plans, 403(b) plans and the federal government thrift saving plan, and also $6,500 in an IRA or Roth IRA. This is instead of $18,000 and $5,500 respectively for younger savers. However, check with your tax adviser, financial adviser and employer’s human resources department before increasing your savings level. There are a variety of restrictions based on your filing status, existence of a retirement plan at work, total income, and even the type of retirement plan your employer offers that collectively may limit how much, or how tax deductible those contributions can be.
This is also the age that you might start receiving some invitations in the mail for a free dinner at your local steakhouse, hosted by financial advisers or estate attorneys. This isn’t a coincidence. Thanks to all the data available about you, professionals who conduct these seminars have the ability to target their invitees by age — and 50 is often a starting point. Attending these events isn’t necessarily a bad thing, and sometimes can be very educational. Just always check the background of the presenter and get multiple opinions on your potential decisions.
This age might not come to mind as a particular milestone for newfound options or potential retirement. However for many 401(k) owners and federal employees, it has a unique characteristic. The way this works is if you have a 401(k) or Thrift Savings Plan and leave that employer after reaching age 55 you can take withdrawals from the retirement account associated with the job you most recently left without having to pay the 10% early withdrawal penalty. Again, always check the plan document, your former or current employer’s human resources department and a tax advisor — but for many plans this feature exists. For planning purposes, this simply provides a level of flexibility. Say you have a built-up balance in one of these accounts and you are looking for new work or deciding your next career move, and if you could just get one particular debt like a mortgage paid off, you would have a lot more freedom. Despite it being considered income, you could pull funds without being charged an extra penalty. The income tax may not be too burdensome considering this scenario implies you may not be working at the time. If you are, then it might not be a fit since the withdrawal plus your earnings all flow to the tax return. And as is often asked, you have to make it to the calendar year you are scheduled to turn 55. You can’t leave the job at 53 and then wait until 55 expecting to avoid the penalty. So if you are still working there and you are ready to tell the boss how you really feel but you have three months to go, perhaps it’s worth putting in the time for your future planning options.
This is the age at which you no longer have to pay a 10% early withdrawal penalty on 401(k) and IRA account distributions. Obviously this is important because if you need the withdrawals for monthly income, or one-time payments, you will pay less tax when taking a withdrawal. It is also the age you can access non-qualified annuity balances without a 10% penalty. This is only for tax purposes, though. Any of these accounts may be held at companies that still enforce a charge for withdrawals due to your relationship with them. Annuities can carry a surrender charge period, 401(k) may not allow a withdrawal at 59½ if you still work at the employer, and IRAs could be anywhere such as a bank CD that carries a penalty for pulling out funds prior to the maturity.
This is still the age that anyone can begin to receive Social Security payments. Congress has not pushed it back as of yet. If you do elect to receive payments, however, this is an age prior to what’s called your FRA or Full Retirement Age. This means if you elect payments and then work there will be a test of your total earnings to see if you are able to keep the income from Social Security. Social Security actually makes these payments up to you over time when you do reach FRA, but the planning decision is simply: Can you keep working? If so, this may be a non-issue. If not, does it make sense to use savings to let Social Security increase or start it so you are spending the government’s money instead of your own?
You can sign up for Medicare beginning three months before your 65th birthday, and coverage can start as early as the month you turn 65. This is separate from your Social Security election decision even though, if you are receiving payments, your Medicare bill will come out of the benefit. Age 65 is often used as a default retirement age because of this ability to sign up for health care. Being separate from any employer, the prerequisite to obtain coverage is simply age and ability to pay. Consider your overall goals and access to health care when selecting age, however.
In 1983, Congress created a multi-decade transition for Social Security to help keep it on a more sustainable path. Whether another such transition is necessary now is being fiercely debated, but under current rules one’s official retirement age is not one particular age but rather a schedule depending on your year of birth. The Social Security full retirement age is 67 for everyone born in 1960 or later. And it is anywhere from 65 to 66 and several months for those born prior. This age, though, like I’ve said, isn’t the first date you can receive payments. It’s really simply the age you can begin or continue receiving payments and also work as much or as little as you would like.
There are two important milestones at age 70 from a retirement-planning standpoint. One is if you haven’t already begun receiving Social Security payments, you will have to do so. If you are working past age 70, then hopefully it is because you have a passion for your profession and a physical endurance above the average, and not because you lack other financial options to cover your expenses. The other milestone happens at 70 and 6 months.
During the calendar year in which you turn 70 and 6 months and every year thereafter, other than an extra window the IRS gives you until April 1 after this first such year, you now have to begin taking distributions from your IRAs and prior employer 401(k)s. This may not be the bad news you might see it as. If you are retired and taking withdrawals already, then these may not only cover your required withdrawals but may be more than necessary. If you aren’t taking withdrawals, the amount you have to take is 3.65% of the value of such retirement assets. This isn’t the tax, simply the amount that must come out and be taxed, leaving the net balance for you to spend, save or gift as you see fit. Check with a tax adviser and financial adviser to verify you are always following these “required minimum distribution” rules, as the penalties are steep.
The Last Day of Your Life
Why is the last day of your life important if you are still, hopefully, decades away from it — and perhaps haven’t even retired yet? Because it is relevant to consider your life expectancy when making decisions about when your retirement will begin and what it will look like. You can look up online using a variety of calculators what your average remaining life expectancy is given your current age, sex, approximate health and lifestyle. But then there is genetics in your family, medical advances and so on. Does the calculator suggest you have a life expectancy of 85 but you have a grandparent of the same sex who is 95 and going strong? Alternatively, does it say on average 82 is your last year but you have several uncles and parents who didn’t reach 65? Within reason, these precedents can and should affect your planning.
So as you can see why it helps to plan ahead – and in stages so you don’t get overwhelmed. The reassuring thing is that many, many people go through this process, and do so successfully.
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