You have probably been saving for retirement (or at least thinking about it) for decades. All the while, retirement has seemed like some mythical city in the clouds that you would never actually reach. Then all of a sudden, your anticipated retirement date is within sight. Are you ready?
Readiness for retirement doesn’t happen all at once. Here are five important ages, and the milestones you should be aware of at each of them.
Hopefully, you’ve been taking advantage of opportunities to save for retirement for a long time, socking away funds in an IRA or 401(k), and taking advantage of employer matches for your contributions to the latter.
Once you turn 50, you have even greater opportunities to save. You can now put away even more than the standard maximum annual amounts in both your 401(k) and your IRA to help you catch up to where you should be in your retirement savings. Not only will this increase your nest egg, but it may qualify you for a larger income tax deductions.
Those who are eligible (individuals aged 50 or above at the end of the calendar year) can make the following catch-up contributions above and beyond the stated maximums:
In other words, if you are over 50, you can save up to $33,000 pre-tax in these accounts per year. That’s the regular maximum contribution of $19,500 for your 401(k), plus the catch-up amount; and $6,000 for your IRA, plus the catch-up amount. If your employer allows you to contribute post-tax dollars to your 401(k), you can save even more.
This is the age when penalties for early withdrawal from your IRA or 401(k) come off the table. If you can avoid taking a distribution from these accounts until age 59 ½, you can dodge the significant consequence of the 10% early withdrawal penalty. This is not to say, of course, that you must begin taking contributions at this age—only that you won’t be penalized for doing so.
Long thought of as “traditional” retirement age, this is when you can—and should—sign up for Medicare. You have a seven-month window in which to apply, beginning three months before the month in which you turn 65.
Long thought of as “traditional” retirement age, this is when you can—and should—sign up for Medicare. You have a seven-month window in which to apply, beginning three months before the month in which you turn 65. Don’t delay in signing up, because there are penalties for late enrollment: a 10% increase in your Medicare Part B premium. Still worse, those penalties could become a permanent part of your premiums. In addition, of course, you may face a gap in coverage if you don’t sign up promptly.
However, if you are still employed and receiving health care coverage from your employer, you may not be required to sign up for Medicare at 65, so long as you work for a company that employs 20 or more people. Your company’s group plan will be your primary insurance, with Medicare as a secondary insurance. If you work for a smaller company, then you must sign up for Medicare within the seven-month window. And even if you can use your employer’s group plan as your primary, compare and make sure it’s in your best interests to do so.
Depending on the year in which you were born, sometime between the time you turn 65 and your 67th birthday, you will reach your “full retirement age” for Social Security purposes. You can begin claiming your full Social Security benefit when you reach full retirement age. You may be able to begin claiming a smaller benefit before that age, and if you defer payments, your monthly check will be a little bigger. Talk to your financial advisor about when it makes the most sense to begin claiming your Social Security retirement benefits.
What happens if you fail to take your RMD in a timely fashion, or don’t take the proper amount? You could end up owing the IRS—and not a trivial amount, either. Any shortfall in taking an RMD is subject to a 50% penalty. In other words, if you should be taking an RMD of $15,000, but you take distribution of only $10,000, you have a $5,000 shortfall, and owe the IRS $2,500.
If retirement suddenly seems right around the corner, or you have questions about whether you’re taking the right steps at the right milestone ages, we invite you to contact our office to schedule a consultation. You may also want to check out our Retirement Checklist.