We’re all familiar with the idea of “milestone birthdays.” In your younger years, you look forward to finally becoming a teenager at 13, getting your license at sweet 16, or (in America) toasting turning 21 with a glass of champagne. Once you get beyond 21, however, the milestone birthdays are less varied and are simply noting a new decade: 25, 30, 40, 50. It isn’t until you get closer to retirement age, that the varied milestone birthdays start up again. When it comes to birthdays in retirement, it’s critical that you mark the milestones because overlooking them can be costly and cause you unnecessary tax liabilities.
1. Age 59½: Your 401(k) withdrawals aren’t penalized
If you’re still working at age 59½ and you’ve got a 401(k) or 403(b), then this year the world opens up to you in what’s called an “in-service distribution.” An “in-service distribution” allows employees to transfer, tax-free, a portion of their vested balance directly from an employer-sponsored retirement plan into an Individual Retirement Account (IRA) or IRA annuity.
Additionally, after you hit 59½, you can withdraw money from your retirement plan without owing an early withdrawal penalty. However, you will still owe federal income taxes on withdrawals from your retirement plan. That’s why it’s a good idea to set aside some of your withdrawal to cover taxes.
2. Age 62: You’re eligible for Social Security (at reduced benefits)
Age 62 is the earliest that you can claim Social Security retirement benefits. However, there is a substantial cost to this. If you start receiving retirement benefits early, your benefits are reduced a small percent for each month before your full retirement age. For instance, someone whose full retirement age is 66 would have his or her monthly benefit check reduced by 25% for life by starting retirement benefits at age 62. If you can delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.
It’s really an age-old question that we get a lot from our clients: Should I take my Social Security early or wait until I turn 66 or 70? The short answer is: it depends on your situation. There is a lot to consider like, what’s your break-even age? What are your income needs? That’s not an easy decision to make because none of this is cookie-cutter. It all depends on your unique needs. That’s why we do a break-even age analysis for our clients and assess the state of their retirement accounts to figure out what makes the most sense for them. Your Social Security plan strategizing isn’t one-size-fits-all. You can’t plan like it is.
3. Age 65: You’re eligible for Medicare
Once you reach 65, you’re able to apply for Medicare, the federal health insurance program. Medicare helps pay for healthcare costs but it doesn’t cover everything or the cost of most long-term care. You’re still responsible for things like deductibles and copays. Other services like dental work aren’t covered at all. So you’ll need to include healthcare costs in your retirement income needs.
65 is an important birthday to flag because missing your enrollment date can mean higher premiums for the rest of your life. If you’re eligible at age 65, your initial enrollment period begins three months before your 65th birthday and ends three months after. Navigating Medicare can be challenging, so we include it in the All Hand’s Analysis™. Clients sit down with Stu Millard to determine what their healthcare needs are and how to plan for them.
4. Age 66 – 67: You’re considered at “Full Retirement Age”
Full retirement age is when you become eligible to take your Social Security retirement benefits without any reduction. If you’re still working once you’re at your full retirement age, you can get your full Social Security benefit payment without any benefits being withheld.
Full retirement age differs based on the year you were born. For many years it was age 65 but the government increased it now that people are living longer and are typically healthier.
5. Age 70: You’re able to claim your maximum benefit
This is the age where you’ve reached your full Social Security benefit. If you choose to delay your Social Security benefits, age 70 is when the benefit amount increases stop. Waiting to start Social Security after age 70 won’t increase your benefit amount any further.
6. Age 70½ – 72: You’re RMDs begin
Once you reach age 72 (70½ if you turned 70½ before Jan 1, 2020), you are required by law to take annual Required Minimum Distributions (RMDs) from your retirement accounts no later than April 1 in the year after you reach 72. Put another way, your RMD is the annual amount you must withdraw from most retirement accounts.
Your RMD is determined by dividing the balance of each qualifying account by a “life expectancy factor” as defined by the IRS. I know that sounds suspect and a bit ghoulish – that’s why we help our clients navigate this potential minefield.
I can’t stress enough the importance of teeing up your RMDs and taking them on time. If you don’t, you could owe a penalty of up to 50% of the amount you should have withdrawn. That’s a costly mistake and one that’s entirely avoidable.
Retirement strategies come in all shapes and sizes
As I said before, retirement isn’t cookie-cutter. They come in all shapes and sizes and depend entirely upon your unique situation. The right strategy for you is not necessarily the right strategy for your brother, friend, colleague, tennis partner. Identifying which milestone retirement ages are key in your strategy is important and should be based on your individual needs. You need to plan accordingly and plan a retirement that fits YOU.
South Shore Retirement Services, take the wheel!
At the most basic level, we try to simplify these milestones as much as possible for our clients. We focus on the milestone retirement ages so they don’t have to. Instead, they can focus on their jobs or enjoying their retirement years — they don’t have to sit around fretting about these dates, waiting for some Medicare form to arrive, or wondering if they’re in compliance with all the rules and regulations.
We consider our clients the captain of their retirement ship, and we’re their crew. They tell us the things that are important to them, whether it’s sailing, playing golf, or spending time with the grandkids, and we’ll chart a course to help get them there.
Rowlette and Associates, LLC DBA: South Shore Retirement Services – an affiliated company – is an independent financial services firm offering both insurance and investment services. Investment advisory services are offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Rowlette and Associates, LLC DBA: South Shore Retirement Services not affiliated companies. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income, generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 01259149 – 04/22
