September 19, 2023

10 Important Ages for Retirement Planning

When planning for retirement, even if that’s a decade or two down the road, it’s essential to keep track of certain milestones along the way. If you miss key deadlines, you could incur penalties. In addition, it’s critical to have a strategy for claiming Social Security at the right time to maximize your retirement income.

Here are some important retirement dates to keep in mind.

Max out retirement accounts at age 49 or younger.
Take advantage of catch-up contributions beginning at age 50.
Your 401(k) withdrawal age could be 55.
Penalty-free withdrawals begin at age 59 1/2.
At age 62, you are eligible to begin Social Security payments.
Medicare eligibility begins at age 65.
The Social Security full retirement age is 66 for most baby boomers.
Age 67 is the Social Security full retirement age for younger generations.
You can boost your monthly Social Security payments if you delay claiming until age 70.
The required minimum distribution age is now 73.

Here are some important retirement dates to keep in mind.

Max out retirement accounts at age 49 or younger.
Take advantage of catch-up contributions beginning at age 50.
Your 401(k) withdrawal age could be 55.
Penalty-free withdrawals begin at age 59 1/2.
At age 62, you are eligible to begin Social Security payments.
Medicare eligibility begins at age 65.
The Social Security full retirement age is 66 for most baby boomers.
Age 67 is the Social Security full retirement age for younger generations.
You can boost your monthly Social Security payments if you delay claiming until age 70.
The required minimum distribution age is now 73.

Take Advantage of Catch-Up Contributions Beginning at Age 50

Beginning at age 50, you can ramp up your retirement savings with catch-up contributions. In 2023, the 401(k) contribution limit is $30,000 if you are age 50 or older. That amount includes an additional $7,500 catch-up contribution.

In an IRA, savers age 50 or older may contribute a total of $7,500 for each tax year.

These catch-up contributions can help investors accelerate retirement savings by compensating for lower contributions in their younger years.

By age 50, "retirement is inching closer and closer, yet you may still be blindly investing in the same things that you did previously when you were in your 20s or 30s," says Brock Westbrook, manager of advanced markets at Country Financial in Bloomington, Illinois.

Your 401(k) Withdrawal Age Could Be 55

Here’s a retirement-savings quirk of which many investors are unaware: If you leave a job when you’re 55 or older, you’re eligible for penalty-free withdrawals from the employer-sponsored retirement plan at your most recent job. This is called the rule of 55.

However, it’s usually better to roll that 401(k) into an IRA, which typically offers broader diversification, says Paul Doak, a certified financial planner at I.D. Financial in Bothell, Washington.

As tempting as it may be to start tapping into those newly available resources, "It is not advised in most cases to start taking retirement income unless there are health issues that come into play," he says.

Penalty-Free Withdrawals Begin At Age 59 1/2

At age 59½, retirement savers can begin making penalty-free withdrawals from their retirement accounts, such as 401(k)s and IRAs.

While the withdrawals are penalty-free, they may still be subject to income taxes. The tax treatment depends on whether the funds were contributed on a pretax or after-tax basis. Those with traditional 401(k)s or IRAs will generally owe income tax on withdrawals, while Roth account withdrawals are tax-free.

It’s not required that you begin making withdrawals at age 59 1/2. For 401(k) accounts and traditional IRAs, the required withdrawal age was recently boosted to 73 from 72. For Roth IRAs, there is no requirement to begin withdrawals at any particular age.

At Age 62, You Are Eligible to Begin Social Security Payments

Just because you can do something doesn’t necessarily mean you should.

Taking Social Security benefits at age 62, the earliest possible age for claiming, comes with several disadvantages. First, your monthly benefit amount is permanently reduced compared to what you'd receive by waiting until your full retirement age, which is either 66 or 67 for people who haven’t yet claimed their benefit.

If you take Social Security before that age, the benefit reduction results in significantly lower monthly income throughout retirement. That could become a big problem if you require more income in your later years.

Additionally, if you continue to work while claiming benefits at 62 and earn above a certain limit, your Social Security payments may be reduced. Delaying benefits can provide a more comfortable retirement income stream.

Many people need the money at age 62, as they have limited options for income. Health issues may also make age 62 the best age for claiming Social Security. However, in most cases, people should crunch the numbers and take longevity into account before taking the money just because it’s available.

David Berns, financial planner at Truadvice in Sarasota, Florida, minces no words when it comes to claiming at 62. "It’s a horrible idea unless you have no other option," he says. "You are taking the lowest amount available to you. Waiting until the full retirement age of 66 or 67 is ideal, especially with people living longer than ever."

Medicare Eligibility Begins at Age 65

Medicare is a complex program with various parts and options, each covering different aspects of health care. Understanding which plans are suitable for your specific needs, including prescription drug coverage, can be overwhelming. That’s why it requires careful research or help from a professional, such as a financial advisor or other Medicare specialist.

You’re required to enroll in Medicare during a seven-month window that begins three months before the month you turn 65. It includes the month of your 65th birthday and the three months after that.

If you fail to enroll during that window, you’ll incur a penalty. Coverage begins the month after you enroll.

The Social Security Full Retirement Age Is 66 for Most Baby Boomers

As of 2023, the oldest Americans not yet taking Social Security were born in 1953. For people born between 1953 and 1959, the full Social Security retirement age is 66.

Delaying the claim of Social Security benefits until your full retirement age offers some pretty big advantages. First, it entitles you to your full, unreduced benefit amount, maximizing your monthly income throughout retirement. That becomes more important over a long life span.

Second, your Social Security benefits can be taxable if your income exceeds certain thresholds. Delaying your benefit can help you manage your overall tax liability by coordinating the timing of withdrawals from other retirement accounts. It may sound arcane, but this can make a big difference to a retiree’s income.

Finally, if you continue to work and claim benefits early, your income could impact your benefit amount due to the Social Security earnings test. Waiting until your full retirement age avoids this potential reduction.

Age 67 Is the Social Security Full Retirement Age for Younger Generations

For those born in 1960 or later, the age to claim full Social Security benefits is 67.

That could change, but it’s unlikely for anyone who’s even remotely close to retiring. The last time Congress raised that age was in 1983, when the oldest people affected were 23 years old and, quite understandably, not paying any attention whatsoever to their Social Security claiming age.

You Can Boost Your Monthly Social Security Payments if You Delay Claiming Until Age 70

The longest you can wait to claim Social Security is age 70. And if you’re financially able, that’s usually a good idea.

Many Americans are hesitant to wait until age 70 to claim Social Security because of concerns about financial security and longevity.

However, this fear can lead to a critical mistake. Waiting until 70 results in the highest possible monthly benefit, which is especially valuable as time marches on. A mistake many retirees makeis underestimating their life expectancies or using their parents’ ages of death as their own gauge. That’s not always accurate, as medical care is constantly improving.

Mortality rates are misleading, Doak says. The typical mortality tables show the average age of death is 77, but that number is skewed by people who died young.

"If you live until age 65, a person in the U.S. is expected to live at least 17 to 19 years more," he says. That means the average life expectancy is closer to the 82- to 84-year-old range. Because that’s an average, the numbers are much higher for many. That means the extra income, plus cost-of-living adjustments, is well worth it.

The Required Minimum Distribution Age Is Now 73

The SECURE 2.0 Act, signed into law in December 2022, changed the age of required minimum distributions, or RMDs, to 73 for people who turn 72 on or after Jan. 1, 2023.

That sounds more complicated than it is. If you’re currently 72 or younger, you are required to start making withdrawals from 401(k)s, traditional IRAs or similar accounts by age 73.

That changes again in 2033, with the required RMD age moving up to 75. These changes incorporate longer life expectancies and account for those who began saving later in life and need more time for account values to grow.

The deadline for taking your RMD is Dec. 31, but for your first RMD, you get a one-time chance to delay the distribution until April 1 of the year after your 73rd birthday. So if you turned 73 in July 2023, the IRS won’t ding you if you wait until April 1, 2024, to take the distribution.

If you're still working when you turn 73, you may be able to delay taking distributions from your employer’s 401(k) plan.

You’re not required to make withdrawals from a Roth IRA, as those contributions were made after Uncle Sam took his cut.

Source: https://money.usnews.com/money/retirement/aging/articles/10-important-ages-for-retirement-planning

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