In This Video:
If you are age 50 or older, there are some key ages to be aware of that would potentially: Save you money; Allow you to save more money towards your retirement; Increase your income; and reduce your overall tax situation. In this video I cover 9 important ages to be aware of, why the age is important, and strategies that may be available to you at those ages.
Things To Consider:
In planning for your retirement or if you are in retirement, age is more than just a number. Your age might mean when new income streams like Social Security are available to you. Your age may give you the ability to put more away in a Roth IRA or Roth 401(k) for more tax-free growth and tax-free income in your future. Your age could open up the ability for tax reduction strategies. When working with clients, age is just one of the many factors we track, but it is an important factor as it helps us determine which strategies may benefit our clients as they prepare for retirement or are in retirement. Here are the 9 important ages you want to be aware of:
Age 50
Once you turn 50, you can begin making catch-up contributions to your retirement plans. For example, in 2021, this means that you can contribute an extra $1,000 to your IRA or Roth IRA. Or, if you have a retirement plan like a 401(k), 403(b), or 457, you could contribute $26,000 per year instead of the $19,500 per year maximum for those under Age 50.
While prior to this age you may have been focused on paying off debts, raising children, paying for your home, or helping your children with college, this allows you to save more to help make sure you are on track to meet your future lifestyle needs and goals. This is also a good chance to put more away while you may be hitting your peak income years.
It is never “too late” to start. Remember that your retirement could last 20 years, 30 years, or even longer. That’s a lot of time for these catch-up contributions to compound and help you build wealth.
Age 55
Some employers and retirement plans allow withdrawals from your current 401(k) plan with no penalty if you leave that job in or after the year you turn Age 55. Leaving could mean retirement or it could mean that you were let go. This only applies to the 401(k) of the employer that you just left. This is sometimes nicknamed the “Rule of 55”. If you are utilizing this rule, contact your 401(k) plan sponsor to see if this option is part of your plan.
If you plan to retire early and all of your money is saved up in qualified retirement plans, this can be a great strategy to utilize to be able to withdrawal money to live your lifestyle without having to incur the 10% early withdrawal penalty.
Age 59.5
Once you turn age 59.5 you have the ability to make qualified withdrawals from your retirement accounts without incurring the 10% early withdrawal penalty. These withdrawals could be from your 401(k), 403(b), 457, SEP, SIMPLE, IRA, or Roth IRA. You can take as much as you want for whatever you want. Don’t forget, withdrawals from certain types of qualified retirement accounts will get taxed as ordinary income.
If you are planning to retire before this age, to avoid the 10% early withdrawal penalty, you should be strategic about where you save. You may wish to add an after-tax investment account to your overall portfolio. That way you have an account to make withdrawals from to bridge the gap between when you retire and age 59.5
Age 62
This is the earliest age you can start collecting Social Security. Be aware, claiming Social Security prior to your full retirement age (FRA) will provide you a reduced benefit. Deciding when to claim Social Security is a big decision. There are no “do-overs”.
Just because Social Security typically shows three ages on their summary sheet (Age 62, FRA, and Age 70) doesn’t mean that you have to retire or claim Social Security at those specific ages. You can claim at any year and any month between Age 62 and Age 70.
It’s important to know that if you claim prior to your Full Retirement Age and plan to continue to work, they will make deductions from your Social Security if you make over the IRS designated thresholds.
Claiming Social Security is a strategic decision in finding a good balance between your guaranteed income stream (Social Security) and your fluctuating income stream (Investments). If you have the wrong balance, you may be taking withdrawals that are too big from your portfolio and could run out of money or you may have to take a lower monthly income. Creating an income plan can help you maximize both.
Age 65
Once you turn 65, you have the ability to go on Medicare. Federal health insurance for people 65 and older. While Medicare is not free, there are premiums for Part B and Part D, it is typically much less than private healthcare.
This is a key age for those that look to retire before Age 65. Don’t forget to include healthcare costs in your early retirement plan. Get some quotes so you fully understand and prepare for the cost of the premiums.
Full Retirement Age (FRA)
This is when you can collect your full Social Security benefit or what they call your Primary Insurance Amount (PIA). The actual age is based on when you were born.
If you were to collect Social Security at Full Retirement Age and continue to have employment income, there are no longer any thresholds or deductions. At this age you have the ability to collect Social Security and make as much as you want in employment income.
If you are married, one key thing to keep in mind is that if one spouse passes away, you only get to keep one of the two Social Security payments. You get to keep the higher of the two. An early death can result not only in emotional stress but also financial stress because of the loss of an income stream. Therefore, it may provide benefit to your plan to have one spouse wait as long as possible before collecting Social Security.
Age 70
This is when you can collect the maximum Social Security benefit. Between your Full Retirement Age and Age 70, if you delay collecting, your Social Security benefit will grow at 8% per year. At Age 70 the 8% increases stop.
One last thought on Social Security. Once you do start collecting, the government Cost of Living Adjustment (COLA) is percentage-based and applied to your benefit. Therefore, the longer you wait to collect could also mean larger COLAs for your future.
Age 70.5
At Age 70.5 you have the ability to make Qualified Charitable Distributions (QCDs). This is where you can give directly from your qualified retirement plan to a qualified charity.
This is a nice tax strategy that when executed properly could help reduce your taxable income. If you are claiming the standard deduction, this could be a way to reduce your overall taxable income in addition to the standard deduction.
Age 72
This is when you must start taking Required Minimum Distributions (RMDs). These are the required withdrawals from your 401(k)s, IRAs, 403(b)s, SEP, SIMPLE, and 457 plans. It’s important to take your RMDs to avoid penalty. If you were to fail to take it, the government would penalize you 50% of the amount you failed to take and they would still tax you on the total amount you should have taken.
Depending on how much you’ve saved into retirement plans, these Required Minimum Distributions can become pretty large. For some, it could put you in a higher tax bracket in retirement than when you were working. By looking at this in advance of retirement there may be some tax strategies that you can put into place to help reduce your long-term tax burden.
Wrap-Up
There are a lot of thoughts and decisions to make when planning for retirement. While the ages listed may give you the ability to start new strategies, it doesn’t necessarily mean that age is the right time nor does it tell you the right amount to make sure you are on track. We’ve helped clients coordinate these decisions through income, investment, health, and tax planning. By coordinating the proper timing, you may be able to increase your income, reduce your taxes, and grow your overall wealth. With the right plan in place, you could utilize these ages and strategies to your benefit.