Retirement planning is the process of optimistically looking forward so that the day you stop working you don’t look backward with regret. The more time you have until that fateful day, the more likely a well-considered plan will be successful. But how do you get started and what can you expect going forward? Here’s a list of things to pay attention to along the way.
Start Right – Start now!
Whether your expected retirement date is a few years or a few decades from now, there is always great urgency to make sure you’re following sensible habits to fund retirement accounts. One very powerful retirement account is an employer’s 401(k).
If one is available where you work, participate in it. If your budget permits, contribute the maximum you can. In 2021, that’s $19,500. If you’re older than 50, then there is a catch up provision that takes your contribution limit to $26,000.
An employer’s matching contribution could boost that by several thousand dollars. Depending on how much money you make, combined employer/employee combination top out at $58,000 in 2021. But they can’t be more than your total compensation.
Taking 401(k) Distributions
If you’re 55 years old, you’re allowed to take withdrawals from a 401(k). The distribution is taxable, but not subject to any penalty. Typically, withdrawals from retirement accounts before age 59½ incur an early withdrawal penalty.
The age 55 rule has a restriction though. You have to be separated from service (fired or quit) from that employer after you turn 55.
Working and Collecting Social Security
Not long ago, people typically retired at age 65. Many of those folks waited until then to start collecting Social Security. That was the age that the Social Security Administration said you hit full retirement age (FRA).
Today FRA is somewhere between 65 and 67 depending on when you were born. Nevertheless, you can still collect Social Security before then. The earliest is 62.
If you do take Social Security early, you pay a price. They ding your FRA-payout by about a third. So, if your regular benefit at FRA would be $1,000, then your age-62 benefit would only be $700.
Taking Social Security early doesn’t mean you have to stop working. But a portion of your benefits may be reduced. The income limit for workers under 65 who collect Social Security benefits is $18,960. The reduction is $1.00 for every $2.00 you earn over that limit.
That ends when you reach FRA. At that point, you’re eligible for your full benefit, no matter how much money you earn. That doesn’t mean you get to keep all of it. Your benefits add to your taxable income.
If you’re patient and wait to collect benefits beyond FRA, you get a little bonus. Your benefit increases every year until you reach age 70. Waiting increases your benefits by about a third of what they would have been at FRA.
What Happens to Your 401(k) After you Retire?
Let’s assume you retire (and begin collecting Social Security) at age 70. Let’s also say that’s when you stop contributing to your 401(k).
Assuming you turned 70 after January 1, 2020, you have just a couple years before you’re required to take money out of your retirement accounts.
This Required Minimum Distribution (RMD) begins the first day of April of the year after you turn 72. The RMD, calculated based on your life expectancy, must be taken by the end of every year for the rest of your life.
The penalty for missing your RMD is 50%! So, this is a retirement planning issue you definitely don’t want to forget.
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