Back To Basics #1: The 7 Most Important Retirement Dates
Michael Jordan, perhaps the greatest basketball player who ever lived, once said: “Winners don’t just learn the fundamentals, they master them. You have to monitor your fundamentals constantly, because the only thing that changes will be your attention to them.” But fundamentals aren’t just about succeeding on the court. They’re crucial for your financial success, too. Understanding the basics of financial planning can be the difference between achieving all your goals or none of them. For that reason, I have started a new series of monthly letters called “Back to Basics.” Each month, we will examine one of the basics of financial planning. This month, we’ll look at the ages you might retire at and the consequences of each.
1. Age 55. When you turn 55, you can start making penalty-free withdrawals from your 401(k). Withdrawing money before this is possible, but it usually results in some pretty stiff fines. That said, making withdrawals at age 55 is usually not recommended. It’s better to keep your money where it is or roll it over to an IRA. Unless you are retiring at a very young age, chances are you will have far greater need for that money later in life. While making withdrawals is not generally recommended, this is often a good source of funds for repositioning your savings for overall tax management. This is often a good time to start a Roth conversion plan or otherwise shifting your contributions from traditional IRA to Roth IRA. If your employer offers it, you should also consider a Roth 401(k) contribution. A little tax pain now can yield significant lifetime benefits. 2. Age 59½. This is when you can make penalty-free withdrawals from both your 401(k) and your IRA accounts. Again, I recommend holding off unless you plan on retiring right away or you are repositioning for tax management. 3. Age 62. This is the earliest you can receive Social Security benefits. That said, your benefits will decrease if you receive them early. Are you noticing a pattern here? 4. Age 65. Age 65 is when you can sign up for Medicare. Tip: Applying 3 months before you turn 65 may help you save money on certain costs, like prescription drug coverage. This is also when people born before 1943 reach their full retirement age , or FRA. More on this in a moment.
If you take benefits at age …
Your benefits will be reduced by around …
62 63 64 65 66 67
30% 25% 20%
13.3%
6.7%
No reduction
6. Age 70. While waiting until your full retirement age ensures unreduced benefits, waiting even longer can help maximize them. As the Social Security Administration puts it, “Retirement benefits are increased by a certain percentage (depending on date of birth) if you delay your retirement beyond full retirement age.” 2 However, this only lasts until your 70th birthday. Once you hit the big 7-0, there’s no point in waiting any longer, because your benefits won’t go up. 7. Age 70½. This is the age at which you must take required minimum distributions , or RMDs, from any pretax retirement accounts like your 401(k) or IRA. This means you must start withdrawing money from these accounts to help pay for retirement. If you fail to withdraw at least the minimum amount, you will be required to pay a penalty. This penalty can be massive — up to 50% of what you were required to take. Many people have no idea how much you are required to take as RMD. Here is an example: Assume you are 55, have accumulated $400,000 in your 401(k), make no further contributions, and earn a 6% rate of return until you have to take RMD. First of all, your account balance would grow to approximately $1,000,000. Your RMD would be approximately $35,000. So if you failed to take the RMD, the penalty would be $17,500. To make matters worse, you have to pay income tax on the entire $35,000. So if you were in the 25% tax bracket, you would get to keep a whopping $8,750 ($35,000 – ($35,000 x .25) – 17,500).
5. Age 66-67. Those born from 1943 to 1959 reach their FRA at 66. For those born in 1960 or later, the age is 67.
What Is Your “Full Retirement Age”?
The Social Security Administration defines your full retirement age as “the age at which a person may first become entitled to full or unreduced retirement benefits.” 1 As mentioned, you can start receiving benefits at age 62, but the amount will be reduced. On the other hand, if you wait until your full retirement age, you will receive the full amount of benefits to which you’re entitled.
It’s important to remember these dates because they can help you avoid penalties and maximize your savings.
Next month, we’ll continue this series by going over some important financial terms everyone should know.
1 “Full Retirement Age,” Social Security Administration, ssa.gov/planners/retire/retirechart.html 2 “Delayed Retirement Credits,” Social Security Administration, ssa.gov/planners/retire/delayret.html
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