Key Retirement Dates

Once you turn 60 retirement is no longer a hypothetical idea. Suddenly you’re both excited and worried about what retirement may bring. Do you have enough? Will it last? When should you start taking Social Security? How does Medicare work? Can you retire early or, will you have to work a little bit longer? Knowing the key retirement dates can help you make better decisions. 

Age 50 – Catch-up contributions to 401(k), 403(b), and IRAs 

The first key retirement planning milestone is the year in which you attain age 50. That’s the year when you can bump up your retirement plan contributions. In 2021, the maximum contributions to 401(k)s and 403(b)s increases from $19,500 to $26,000 per year. For Traditional and Roth IRAs, the maximum limit rises from $6,000 to $7,000 per year. If you are behind contributing to your retirement, these additional “catch-up” contributions can help but for many they will not be enough to make up for a lifetime of under saving. For those that have saved enough, they may still want to “max out” their 401(k) or 403(b) contributions because these tax deductions are not phased-out at high incomes. 

Age 55 – Early retirement from 401(k) plans

If you are working and saving to a 401(k) plan at work and decide to retire at age 55, you may be able to begin taking withdrawals—without penalty—from your employer-based plan.[1] The normal age to begin taking retirement plan withdrawals without the 10% early withdrawal penalty is age 59½. If you have saved enough and are planning an early retirement, this can be really helpful. However, withdrawals from pre-tax accounts are taxable at ordinary income tax rates. So, you’ll need to take that into consideration. 

Age 59½ - Penalty-free withdrawals from retirement plans

After years of saving and investing for retirement you can finally start taking withdrawals from your retirement account without the early withdrawal penalty. If you are considering a withdrawal before then for, say a big purchase or an emergency, you’ll pay ordinary income tax plus a 10% penalty on the amount withdrawn. For emergencies, it may be the only option for some but the cost is steep. 

For example: Let’s say you are 45, married and making about $250,000 / year. If you withdraw $50,000 to buy a new vehicle, you’ll pay a $5,000 early withdrawal penalty, about $12,000 federal income tax and $2,500 in MA state income tax. So, your $50,000 early withdrawal would leave you with only $30,500. That’s a pretty big hit. 

Age 62 – Early retirement for Social Security

This is the earliest age at which you can obtain Social Security benefits. Some people will need to claim Social Security early due to insufficient savings or an inability to work due to a disability or health issue. But for others, claiming benefits early could be mistake, especially if they live a long time in retirement.[2] Claiming at age 62 instead of your Normal Retirement Age can result in nearly a 40% reduction in your benefit. 

Age 65 – Medicare enrollment[3] 

Once you retire, you’ll still need health insurance and, for most people, that means a combination of Medicare and a Medigap or Medicare supplement policy. However, you must sign up for Medicare during the enrollment period which runs three months before you turn age 65 through three months after you turn 65. If you miss this enrollment period, there is a lifetime penalty that gets added to your monthly Part B premium. Don’t miss this date. 

Age 67 – Normal retirement for Social Security[4] 

For many people, age 67 will be their “Normal Retirement Age.” In other words, that will be the age at which they receive their full retirement benefit. Retiring before age 67 means a permanent reduction in benefits. In fact, if you were born in 1960 and decide to retire early, your benefit would be reduced by 8% for every year before age 67. 

Age 70 – Maximum Social Security benefits

If your Normal Retirement Age is 67, you can permanently increase your Social Security benefit by deferring benefits until age 70. For each year that you defer, you’ll be increasing your benefit by 8%, or over 24% if you defer until age 70. While it may seem counterintuitive to defer collecting, most Americans are going to spend far more time in retirement than they expect. Today, the average 67-year-old retiree is expected to live another 20 years[5]—that’s age 87 and that’s the AVERAGE. In other words, a significant portion will live beyond age 87 and a smaller but significant number will reach age 100. For many, deferring benefits will be the smart financial decision, ensuring the maximum benefits for the rest of their life. 

Age 72 – Required Minimum Distributions (RMDs)

Recent legislation pushed the RMD date from age 70 to age 72. This is the age at which you must start taking money out of your 401(k), 403(b), Traditional IRA or other qualified, pre-tax retirement account. This gives retirees a little more time before you have to start taking withdrawals which are completely taxable. For those with Big IRAs[6] this can be a big problem. And, the failure to take your RMD is stiff—you’ll pay a penalty tax of 50% of the amount you were supposed to take out AND regular income tax on the missed withdrawal. 

There are a lot of dates to remember for retirement. We hope this quick list helps you stay on track. If you have questions about what deadlines apply to you, give me a call. I’m here to help. 

Lyman H. Jackson

Lyman@PlanWithFPS.com

617-653-3303

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.

[1] Your employer’s qualified retirement plan must have elected for this provision to be eligible.

[2] Retirees typically underestimate how long they will live in retirement.

[3] https://www.medicare.gov/blog/medicare-enrollment-period-2020

[4] For retirees born in 1960 and later. https://www.ssa.gov/OACT/ProgData/nra.html

[5] For a female retiree. https://www.ssa.gov/OACT/population/longevity.html

[6] See my blog on Big IRAs published 1/29/21 at www.PlanWithFPS.com/blog