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50, 59 ½, 62, 65, 66, 70, 70 ½: The birthdays (and half-birthdays) that matter most
The age you retire will likely differ from your neighbor, relative, or co-worker. But in preparing for retirement, there are certain ages that everyone has to be mindful of because of IRS rules on retirement accounts or government benefit programs like Social Security or Medicare.
Keep these ages in mind and you’ll be prepared to optimize the benefits you get.
50: Start Of Eligibility For Catchup Contributions To Your 401(k) Or IRA
Catch-up contribution rules in your tax-deferred retirement plan allow you to contribute in excess of the statutory limit of $18,000 (in 2017). In 2017, the catchup contribution is an additional $6,000 (so $24,000 annual limit in total) . The idea is that the closer you are to retirement, you may want to contribute more if you didn’t save as much as you would have liked earlier in your career.
What It Means For You: Before paying taxes on money meant for retirement, make sure, starting at age 50, you’re contributing up to the $24,000 maximum.
59 ½: Early Withdrawal Penalty Goes Away
This is the age when most tax-advantaged savings plans (such as a 401(k), IRA or the federal government’s Thrift Savings Plan) allow withdrawals to be made without having to pay a 10 percent “early withdrawal” penalty on investments, and their associated earnings.
What It Means For You: Just because you can avoid the 10% penalty does not mean it’s a good idea to withdraw money unless you need it. Why? You’ll still have to pay ordinary income tax on the money you take out and the more you take out, the less your portfolio will earn in the future.
62: Earliest You Can Start Social Security
The Social Security Administration allows Americans to start taking old-age benefits as early as age 62 (or 62 years and a month if you want to get technical).
What It Means For You: This is also one of those instances where just because you can doesn’t necessarily mean you should. The monthly paycheck you’ll get from Social Security goes up significantly the longer you can wait. You’ll only get a paycheck that is 75% of what it would be if you waited until Full Retirement Age (set at age 66 for current retirees).
65: Medicare Eligibility
You can enroll in Medicare as early as three months before your 65th birthday (and you should do it as soon as possible to make sure you don’t miss open enrollment).
What It Means For You: It’s a good idea to get informed about your options beginning at your 64th birthday because that’s probably when you’ll start to get inundated with sales pitches from private companies or brokers selling Medicare supplement (a.k.a. Medigap) plans. Some good resources are put out by AARP and the Medicare Rights Center to prepare you.
66: Full Retirement Age (FRA) For Social Security
Those born retiring now born before 1954 will reach what the Social Security Administration defines as a Full Retirement Age on their 66th birthday. Those born after 1954 will have to wait a bit longer. Check out the full table here.
What It Means For You: If you wait until Full Retirement Age, you’ll have a significantly higher paycheck than if you’d started benefits at age 62. But you can get higher benefits still if you wait until age 70. Want to learn more about this important decision? You can download a free, 20+ page Social Security guide here.
70: The Latest You Should Claim Social Security Benefits
This is the latest it makes sense to start benefits, even if you’re still working, since delaying claiming beyond this age won’t get you a bigger monthly check. (Should you forget to claim at 70, you can get up to six months of retroactive checks when you do claim.) Due to better consumer education and increasing awareness about the financial challenges associated with longer lifespans, more Americans are deciding to wait until age 70. The general rule of thumb is that for each year you wait from Full Retirement Age, your payments go up by 8% nominally. Said differently, if you waited two years past FRA, your monthly paycheck would be 16% greater. If you waited three years past FRA, that paycheck would be 24% greater.
What It Means For You: If you’re in good health and don’t need the income stream sooner, there are many reasons to wait until age 70. Here’s some more information on the topic from Charles Schwab. One thing to keep in mind — if your financial advisor is acting in his or her self-interest and paid based on the amount of your money they manage, he or she would have an incentive to encourage you to take Social Security earlier than age 70 because waiting (all else equal) would mean the advisor makes less money. Make sure your advisor has your best interests in mind.
70 ½: When Required Minimum Distributions Must Begin
The Required Minimum Distribution (RMD) is an IRS-mandated minimum amount you must withdraw from your tax-deferred accounts every year starting at age 70½. If you don’t take your RMD, you can be penalized by up to 50% of the amount you were supposed to have withdrawn. This is one of the reasons why knowing the ins and outs of RMDs is so important.
What It Means For You: Required Minimum Distribution rules can be tricky and if you don’t abide by them, you will have to pay a stiff penalty. My colleague at Abaris, Nimish Shukla, recently wrote a guide to RMDs that you can download here.
To summarize: Your age matters when it comes to retirement preparation. Miss an important milestone and you risk losing a benefit you could have been receiving or making an important decision without all the information.
