Retirement planning is a process that actually continues throughout your retirement years, with tweaks and changes to ensure that you stay on track. Many folks will immediately think of their portfolio and rate of return, but your age is also an important factor that can help you maximize certain benefits, while helping you avoid mistakes, which are often accompanied by hefty penalties. Make sure to mark your calendar for these important milestones.
In order to help illustrate these points, we'll use the example a fictional 49 year old named Claire, who was born in 1965. Claire is still putting in hours at the office, but her children are in college and she's starting to think more seriously about her retirement. Let’s examine how these retirement milestones work for Claire and many others years away from retirement:
Age 50. Once Claire reaches age 50, she's eligible to take advantage of something called the "catch up" provision, meaning she can make greater contributions to her qualified retirement accounts (individual retirement accounts, Roth IRAs, 401(k)s, etc.). Claire is now able to contribute an extra $1,000 to her IRA and Roth IRA, increasing her total contribution from $5,500 to $6,500 annually. If able, she can also add an extra $5,500 to her 401(k), increasing the contribution limit from $17,500 to $23,000 annually. It's important to take advantage of this provision, if you weren't able to start saving for retirement as soon as you would have liked.
Age 591/2. One of the good things about getting older, aside from getting wiser, is that Claire will be able to access her retirement savings. Age 591/2 allows individuals to avoid the 10 percent "early withdrawal penalty" if an unplanned event or illness occurs. However, income tax is still assessed on traditional 401(k) and IRA withdrawals, while withdrawals from Roth-optioned accounts are tax-free if held in the account for more than five years. It's important to understand the differences between Roth and traditional accounts and assess the advantages of one over the other.
Age 62. This is the earliest age that Claire is eligible to file for Social Security benefits, but there is a catch. If Claire files for Social Security, as soon as she turns 62, then she will only be eligible to receive 70 percent of her total benefit. Also, should she decide to file and continue to work, her benefits could be partially or entirely withheld and taxed. However, if she continues to work and files for Social Security, once she has reached her full retirement age of 67, then she will receive her full retirement benefit, regardless of income.
Age 65. Once Claire turns 65, she is eligible to enroll in Medicare. This means that she no longer has to rely on employer-sponsored or private health insurance plans. An important point to remember is that filing for Social Security does not automatically include enrollment in the Medicare program. Claire will need to register for Medicare benefits during a 7-month window, including the three months before her 65th birthday, her birth month and three months after, to avoid possibly paying higher premiums for coverage.
Age 66 and 67. For the majority of baby boomers (born between 1943 and 1954), the retirement age will be 66. For Claire, because she was born after 1960, her full retirement age is 67, which means that she is now eligible to receive her full retirement benefit. Should Claire decide that she wants to claim her benefits at age 65 and not wait until her full retirement age of 67, then, according to the Social Security Administration, she will receive about 87 percent of her total benefit.
It's important to note as well, that spousal benefits are also affected by the decision to receive benefits early. A spouse may claim 50 percent of the higher earner’s benefit. So if Claire, having the higher earnings record, decides to file at 65 and not 67, and receive a reduced benefit, then her spouse would receive 50 percent of her reduced benefit.
Age 70. If there is a penalty for drawing Social Security benefits early, there must be an advantage when you delay receiving benefits, right? That's correct. For every year that Claire delays drawing her Social Security benefit, she receives a "Delayed Retirement Credit," which is an 8 percent annual increase to her accumulated Social Security benefits. Claire decides to work a couple more years and not file for Social Security at 67, so she can receive that 8 percent increase. However, she is only able to receive the delayed retirement credit until age 70. After age 70, there isn't any advantage to delay filing for benefits.
There are numerous strategies and ways to file for Social Security and depending on your specific situation, you want to develop a filing strategy that will substantially increase your benefits over your lifetime. I strongly recommend that people do their research and develop a filing strategy that ensures receipt of the maximum benefit.
Age 701/2. Once Claire reaches age 701/2, she is required to begin taking required minimum distributions from her traditional retirement accounts, or she will have a 50 percent tax penalty on the amount that should have been taken out. That's a pretty substantial fine by the Internal Revenue Service. Where else can one be penalized for continuing to save money? Scheduling and taking required minimum distribution withdrawals is one of the most important things that retirees must remember to do.
Until this point, Claire's traditional qualified retirement accounts have grown tax-deferred. She has only paid taxes on money withdrawn. However, she can't keep money in her retirement accounts indefinitely, because the function of these accounts is to provide income during retirement. Required minimum distributions are a way to ensure that the government is able to collect tax revenue on the tax-deferred dollars that are held in these accounts. Required minimum distributions do not apply to Roth-optioned retirement accounts, which is a great advantage of Roth accounts.
I hope that this quick overview of significant retirement milestones, illustrates the importance of factoring your age into your retirement planning.
Kelly Campbell, certified financial planner and accredited investment fiduciary, is the founder of Campbell Wealth Management and a registered investment advisor in Alexandria, Virginia. Campbell is also the author of “Fire Your Broker,” a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.