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.
Called the IRS Rule of 55, it does not apply to the self-employed. It is limited to employers’ qualified plans, which don’t include IRAs.
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, but your benefits will be reduced. Widows and widowers can apply at 60.
If you work past age 62, your benefits may be reduced if your earnings are over a set threshold. Even if you don’t work, your benefits will still be reduced if you start taking them before you reach Full Retirement Age (FRA).
FRA is generally age 66 or older. Collecting benefits before FRA reduces them and working past FRA may subject some or more 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 Act
The Coronavirus Aid Relief and Economic Security (CARES) Act of 2020 made changes to a couple of the above provisions.
First, it allowed you to take up to $100,000 from an IRA or employer sponsored retirement plan (CARES distribution) without subjecting you to the early withdrawal penalty. But CARES distributions are considered taxable income.
You can elect to have the entire distribution considered income in 2020. Or you can spread it out evenly over three tax years, one-third each per year starting with 2020.
For example, if you took a $90,000 CARES distribution, you can elect to declare all of it in 2020. Or you can elect to have $30,000 considered income each year in 2020, 2021, and 2022. You have until the date you file your 2020 return (including any extensions) to make one of the two elections.
The CARES Act also allows, but does not require, you to return a CARES distribution to the same or other retirement account. You have the same three years to do this (2020, 2021, and 2022).
You can return any or all of the distribution over that time frame. Any amount you put back into a retirement account will be deductible from that year’s income.
To qualify for a CARES distribution, you or your spouse would have to have been diagnosed with Covid-19, furloughed or laid off from work, or otherwise experienced a loss of income because of the pandemic.
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.
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. Our Retirement Planner Calculator can help with that. And our Member Service Representatives are available to answer questions about the process.