You’ve worked hard all of your life. You’ve saved and invested your money, paid taxes on your income and you’ve made the mandatory contributions to government programs like Social Security and Medicare. Like so many others, the dream of no longer having to work is a big one and you can now see the retirement light at the end of the working tunnel. Financial planning for retirement should be at least as straightforward as saving for retirement, but it is not. One of my favorite sayings is, You don’t know what you don’t know, which can be so true in planning for retirement! I’ve always said to my clients that if you ever wanted to run for congress, do it on the premise of simplifying the system for retirement income and that alone would probably garner enough votes to win! But, since that has not yet been done, here is a somewhat simplified list of important ages to be aware of in planning for your retirement income.
50 is how old you have to be to begin making catch-up contributions to your retirement accounts. This means that you are allowed to contribute more money than your younger colleagues. 50 is also the earliest age that a disabled-widowed spouse may receive the social security widow/widower’s benefit.
55 is that age that, if you leave your employer (you must be 55 or older when you separated from service) you can begin taking money from that employer-sponsored qualified plan (for example, your 401k) without the hit of a 10% IRS penalty. You will still pay ordinary income taxes due, but the penalty for premature distribution goes away. (important – your IRA’s are not eligible for this premature distribution penalty waiver at 55, you have to wait a few more years)
59 ½ is the age that you have to wait under normal circumstances until you can take money from your IRA’s without paying the 10% premature distribution penalty. On another 59 ½ note, if your employer-sponsored plan allows in-service distributions, meaning the option to move money out of your 401(k) or other employer-sponsored retirement account while working, the IRS allows you this option beginning at 59 ½.
60 is the earliest that a widow or widower can receive the social security survivor’s benefit if they are not disabled. The benefit will usually be 71.5% of their deceased spouse’s retirement benefit at full retirement age.
62 is the earliest age to receive your own social security retirement benefit. Although you begin receiving social security retirement income earlier than your full retirement age (as defined by the Social Security Administration), your monthly check will be about 75% of what it would have been had you waited until your full retirement age, and for workers born in 1955 and after, your early retirement benefit is actually a little less than 75%. 62 is also the earliest age a spouse can receive the Social Security spousal benefit. For a spouse claiming the social security benefit, the amount is typically 35% of the worker’s full retirement age benefit. Again, if you were born in 1955 or later, your benefit will be slightly less than 35% with the minimum being 32.5%.
65 is the age which Medicare coverage becomes effective. If you are not receiving Social Security at age 65, make sure you know the enrollment period for Medicare. If this slips by without you signing up, you may have to pay a higher premium.
66 is the FRA, or Full Retirement Age for social security for workers (whether or not you are still working, you either are or were the “worker”) born between 1943 – 1954. If you were born later, your FRA increases by two months for each year after 1954, up to a full retirement age of 67.
At FRA, your spouse can begin receiving the maximum social security spousal benefit for retirement income, which is 50% while you are still living. If you die and your spouse reaches FRA, he or she can begin collecting 100% of your retirement benefit including any delayed retirement credits. FRA is also the age at which the reduction in social security benefits no longer applies due to excess earnings. In other words, if you are working you may be receiving “excess earnings” as defined by the Social Security Administration, which will reduce the amount of social security you receive if you are collecting benefits before your FRA while still working.
67 is the FRA for workers born in 1960 and later.
70 is the age of maximum social security retirement benefit, if you delay taking your social security retirement income (COLAs, or cost of living adjustments will still apply after age 70).
70 ½ is the age in which you are required by the federal government to take minimum distributions from your traditional IRA’s and qualified retirement plans, including the Roth portion of a 401(k).
RMD’s (Required Minimum Distributions) must begin no later than April 1 of the year following the year in which you reach age 70½ and must be taken every year thereafter. This is a big deal because if you forget to take your RMD’s, the penalties are steep, 50% of what you should have taken! RMD’s in and of themselves are a lengthy subject, and unfortunately I do not have the space to write about in detail here. I recommend you speak with a qualified professional or do more research yourself to understand the rules for your specific accounts.
Navigating through retirement income planning can be tricky. The retirement income distribution phase of your life should encompass a different plan and likely different financial tools than you’d used during your accumulation phase. Most of us wish retirement planning were simpler, but alas, here we are in 2019 where the rules, laws and financial landscape are more complex than they’ve ever been. In complex areas of life, it is always a good reminder that, we don’t know what we don’t know. And in retirement income planning, that can be costly.
Sources: Social Security Administration, IRS, medicare.gov.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.