Age-Related Retirement Rules That Every Retiree Should Know
Different planning considerations apply as you get older
Certain retirement planning events are triggered at specific ages, such as when you can begin drawing on Social Security or when you are required to take IRA distributions. Others aren't...but maybe they should be. Here's a list of what happens, of certain rules kick in, and what you should be thinking about as you reach various ages leading up to and into retirement.
It's time to get serious about your retirement planning. You'll want to start putting together projections that detail where your retirement income will come from. This retirement income plan is best laid out in a timeline format so you can see year-by-year when pensions or Social Security will begin. Rather than looking for the best investments, think about strategies that can help you maximize your lifetime income. For example, start shifting a portion of your portfolio into a bond ladder so that CDs or bonds are lined up to mature and match up with your future retirement age.
If you're going for an early retirement, make sure you budget for the cost of health insurance—it can be expensive until age 65 when Medicare begins.
If you need cash now, you may be able to access your 401(k) money penalty-free if you retired after reaching your 55th birthday.
Age 59 ½
This is the earliest you can begin taking withdrawals from your IRA and other retirement accounts without incurring a penalty tax. Some families may benefit from taking withdrawals at this age and delaying the start of their Social Security until age 70. Retirement account withdrawals will show up on your tax return, so now is a good time to begin to look into how your retirement income will be taxed.
You'll also want to look into the costs and benefits of long-term care insurance to cover health care costs in later life that won't be covered by Medicare or Medicare Supplement policies.
Start building up cash reserves if you're within five years of your desired retirement age. Get more conservative with your investments and consider meeting with a retirement planner who can help you see if you're on track to have enough money to retire in the next few years.
This is when you can begin receiving Social Security benefits, but you'll receive a greater Social Security benefit if you wait until about age 66 to apply. You'll get an even larger benefit if you wait until age 70 to start collecting. Read up on Social Security rules such as the earnings limit before making this important planning decision. The earnings limit can reduce your benefit amount if you take Social Security early and continue to work.
Age 65 is when Medicare begins. Most U.S. folks should enroll in Medicare a few months prior to their 65th birthdays even if they have employer or retiree health coverage. Part of your Medicare coverage is free if you have enough years of work in the U.S., but Medicare Part B is not free. You'll pay a premium based on your MAGI (modified adjusted gross income) from your last two years' tax returns. If your current income is much lower than your income was two years ago, you can request a decrease in your Medicare Part B premium.
For most couples, delaying the start of the highest earner's Social Security until he reaches age 70 makes a lot of sense, but there's absolutely no benefit to waiting until past age 70 to begin benefits.
Age 70 ½
You're required to take distributions from your IRAs and/or other qualified retirement accounts like 401(k) plans when you reach the age of 70 1/2. These mandatory distributions are called required minimum distributions or RMDs. They can be made in cash or you can distribute shares of investments. The total dollar amount that's distributed will be included as taxable income on your tax return. You can have taxes withheld directly from the distributions. This is often a good idea so you don't come up short on funds when you file your tax return.
It's important to review the plans you've put in place every few years. Periodic reviews allow you to catch small problems before they become large problems. You'll also want to give some thought to end-of-life decisions and begin discussing them with your spouse and immediate family. It might be tough to start these conversations, but including your family in your planning is the responsible thing to do and it makes everything easier for all those involved.