Retirement planning is a complex topic. There are lots of rules and many variables. Planning far into the future involves uncertainty. This complicates planning and can reduce the likelihood of precisely hitting specific targets. Individual circumstances, risk tolerance, and need drive many of our decisions. But within all of the complexity, there is still a degree of certainty. Specific retirement milestones occur at specific ages.
Why is Age 55 so Important?
The majority of Americans need to work well past 55 to finance a comfortable retirement. But age 55 is important for those who can retire early. This is the youngest age you can take distributions from a retirement plan, like a 401(k), without incurring an early withdrawal penalty.
This exception to the rules regarding retirement plan distributions is so distinctive that the IRS has a name for it.
The Rule of 55 says that participants in an employer-sponsored retirement plan can begin penalty-free withdrawals when they separate from service after reaching age 55. Other plans, like IRAs, don’t enjoy this exception. Generally, distributions taken at age 55 from all other types of retirement plans would be subject toan early withdrawal penalty.
Early Withdrawal Penalties Disappear at Age 59½
Age 59½ is another important milestone in retirement planning. This is when you can start taking distributions from any retirement plan – including your IRA – without incurring an early withdrawal penalty.
But just because you can doesn’t mean you should. If you don’t need the money – even if you are retired at age 59 ½ – you may be better off leaving the money where it is. Delaying distributions from your retirement plan can mean more money later in life. And this gives you more options.
Social Security is Available at Age 62
The earliest you can start collecting Social Security is generally age 62 (widows and widowers can apply at 60). But age 62 is short of what the IRS defines as Full Retirement Age (FRA). At FRA you’re entitled to your full Social Security benefit.
So, benefits taken before FRA will typically be lower than if you wait. What’s more, those benefits could be reduced if you continue working.
If you work between age 62 and full retirement age, your benefits may be reduced (at a predetermined rate) if your earnings are over a set threshold. Then, when you reach FRA, you can continue working and still receive your full benefit, regardless of how much money you make.
The threshold (and reduced benefit) only applies before you reach full retirement age. Nevertheless, working past FRA may subject some of your benefits to income taxes.
Healthcare Assistance Kicks in at Age 65
Sixty-five is the age at which you become eligible for Medicare. It is also when you get to make some decisions about your health care options.
- Will you enroll in traditional Medicare or Medicare Advantage (Part C)?
- Will you opt into a prescription plan (Part D)?
- Will you couple Medicare with a supplement plan?
These can be huge decisions that may affect your health care for the remainder of your life. So, you should research your options and consult an advisor knowledgeable in these areas.
When will you Reach Full Retirement Age?
Full Retirement Age is when you become eligible to receive Social Security benefits without any reduction. People reach FRA sometime between their 65th and 67th birthday.
If you were born between 1943 and 1954, your FRA is 66. It is age 66 plus two months for each consecutive year between 1955 and 1959. For example, it’s 66 plus two months is you were born in 1955 and 66 plus 10 months if you were born in 1959. Those born in 1960 or later reach FRA at age 67.
Working Beyond Age 70
If you start collecting Social Security while you are still working, and earn more than an indexed threshold, then a portion of your benefits will be reduced. That ends on your 70th birthday.
At age seventy, your earnings won’t have any impact on your full benefit. You can make as much as you like with no reduction in benefits.
Tax Deferred Accounts Have a Finite Life
Income and growth in qualified retirement accounts, like 401(k)s and IRAs, are not taxable until you withdraw the funds. This tax deferral can continue for decades – even after you retire. But at some point you have to start withdrawing money, even if you don’t need it.
Tax rules establish a Required Minimum Distribution (RMD) that you must take out of retirement accounts starting the year after you reach either 70 ½ or 72.
- If your age prior to January 1, 2020 was 70 ½, then the year you reached that milestone is when the RMD clock started ticking. You should have taken your first RMD the year after you turned 70 ½.
- If you attain age 70 ½ in 2020 or later, then your RMD must begin on April 1st the year after you reach age 72.
RMDs must be taken by the end of the year and become taxable income when funds are withdrawn. Not taking the RMD doesn’t avoid taxes. If you don’t take the full amount, there is a very steep penalty.
Changes Resulting From the CARES Acts
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 made changes to some of the above provisions.
You may take up to $100,000 from an IRA or an employer sponsored retirement plan without incurring an early withdrawal penalty if you or your spouse was diagnosed with Covid-19 or if you were furloughed, laid off, or otherwise experienced a loss of income because of the pandemic.
The distribution will be included in income and spread out over the next three tax years, one-third each per year, unless you choose otherwise. CARES distributions from qualified plans are not subject to federal tax withholding.
If you took a CARES distribution, you should seek the advice of a tax professional to help you determine the impact on your taxes and how you might plan around that.
The CARES Act also waived all RMDs for 2020. If you took a distribution you may have the opportunity to put the money back into your retirement account.
Key Ages in Life Can Impact Your Retirement Planning
Understanding what rules begin at what ages can aid you in your retirement planning efforts.
The age at which you retire is completely a matter of choice. Whether or not you can afford it is a function of your savings and consumption goals. The various rules that begin at certain ages can affect the economic efficiency of how and when you access your retirement savings. The key is to get each of these things aligned.
Proper planning can help you optimize your withdrawal strategy. Consult your Retirement Plan Advisor to learn more about the key milestones in your retirement planning journey.