FINANCIAL PLANNING TIDBITS: RETIREMENT MILESTONE BIRTHDAYS
SUMMARY
In certain years, your birthday can have a key impact on your retirement planning.
PARTY FAVORS
Felicitations! You’ve just attained another year of experience and wisdom. And, depending on the year, you might have gained a little something beyond another candle on the cake. No matter when you plan to retire or if you already have, certain birthdays will have a greater impact on your financial planning than others, particularly from savings and cash flow standpoints.
In an effort to regulate savings strategies and encourage long-term planning, government policy over the years has assumed a certain timeframe and trajectory for everyone’s retirement. Certain requirements are met only at certain ages. Here is a list of important birthdays to consider in your retirement plans.
AGE 50
Once you turn 50 years old, you have the option of making a catch-up contribution to each your IRA and your qualified retirement plan(s). Doing so when you’re already maxing out your accounts each year can increase confidence in your retirement and provide some cushion to your plans.
| Traditional & Roth IRAs | 401(k), 403(b), most 457s, TSPs | SIMPLE IRAs | |
|---|---|---|---|
| Contribution Limit | $6,000 | $20,500 | $14,000 |
| Catch-up Contribution (age 50) | $1,000 | $6,500 | $3,000 |
| Total Allowable Contributions | $7,000 | $27,000 | $17,000 |
| *All numbers as of 2022. | |||
AGE 55
Sometimes, our career path doesn’t look typical. If you separate from your job in or after the calendar year you turn 55, the rule of 55 allows you the option of withdrawing funds from your 401(k) or 403(b) without penalty. Furthermore, it doesn’t matter whether you have quit or been let go. The rule of 55 is only applicable to the 401(k)/403(b) of the employer from whom you have separated—you can’t access plans from prior employers. Having access to penalty-free withdrawals can provide a buffer if you lose your job and need funds while you search for a new one, or if you retire at 55 or later.
AGE 59.5
Once you are halfway through your 60th year, you are eligible to begin taking out 401(k) and IRA money without having to pay a 10% early withdrawal penalty. Be mindful that these funds are still taxable, however, and that a Roth IRA must be at least five years old at the time you take distributions of any earnings to avoid the penalty. This age and the penalty do not apply to inherited traditional IRAs.
AGE 60
This is the earliest age at which a widow or widower can take Social Security off of his or her deceased spouse’s earnings record. Survivor’s benefits are reduced versus waiting until your survivor Full Retirement Age (FRA), and you will be subject to the Social Security earnings test, but you may be able to take benefits while letting your own retirement benefit grow until age 70. As there are many factors to take into account before deciding to do this, please reach out to us at Day Hagan if you are interested in exploring this option.
AGE 62
When you turn 62, you are eligible for early Social Security retirement benefits. Keep in mind that taking early Social Security diminishes the monthly payment to which you are entitled at your Full Retirement Age (FRA) by up to 30%. The closer you get to FRA, the less that reduction will be. This is why cash flow planning before you make the decision to take Social Security is so important. The income you bring in from Social Security, combined with whatever income you expect to receive from your retirement assets, needs to be enough to cover your expected expenses.
AGE 65
Here is the big year for which everyone seems to be waiting most excitedly: the year you qualify for Medicare. For many people, registering with Medicare is a huge step toward retirement freedom—they no longer have to worry about keeping a job to maintain affordable health coverage. When you apply, be sure to consider your supplemental insurance options.
AGE 66-67
As a way to curb the hemorrhaging happening in Social Security funding, the government changed the standard full retirement age of 65 on a graduating scale based on year of birth. For those born from 1943 to 1954, FRA is now age 66. For those born on or after 1960, FRA is now age 67. Note that if you were born on the first of the month, the Social Security Administration counts you as having been born the previous month, which means if you were born on January 1, you are considered to have been born in the prior year.
| Birth Year* | Full Retirement Age (FRA) |
|---|---|
| 1943-1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 and later | 67 |
| *Those born on January 1 should refer to the previous year. | |
AGE 70
Let’s say you decide to hold off taking Social Security for a few years in the interest of letting your benefit grow. As a way to encourage people not to draw on their Social Security as soon as they’re eligible, policy was enacted that allows for a benefit increase by as much as 8% a year if you wait to take Social Security after your full retirement age in what is called earning delayed retirement credits. This increase continues on a monthly prorated basis until age 70, at which point no further increase in your benefit is available. If you haven’t been taking Social Security, now is the time to start.
AGE 72
While you have been allowed to take money from your qualified accounts without penalty since turning age 59.5 (or age 55 if you qualify for the rule of 55, above), you are forced to take a required minimum distribution, or RMD, each year starting at age 72. RMDs apply to non-Roth IRAs and qualified retirement plans. They are calculated using an IRS table based on your age and the prior end-of-year value of your account. Failing to take your RMD within the year will result in a 50% (yes, 50%!) penalty. If your account with us is subject to a RMD, Day Hagan will contact you before the end of the year to ensure you take it in time.
THE ICING ON THE CAKE
Not every milestone birthday referenced above will have an impact on your retirement. The nice thing about having this information, however, is being better prepared to strategize important retirement efforts, especially when it comes to planning from where your income is coming once you quit the workforce for good. If you have any questions about the timing of your retirement planning, reach out to us at Day Hagan.
Best,
Natalie Brown, CFP®
Director of Client Services
Day Hagan Private Wealth
—Written 03.29.20212
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