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Key Retirement Ages

Key Retirement Ages

September 07, 2022

Retirement or financial independence can feel like an abstract concept until it’s staring you right in the face. Many people don’t start seriously considering their retirement plans until their 50’s. While it’s never too early to start planning for financial independence there are opportunities you can miss out on if you’re not paying attention to some key age milestones. Fortunately most of these come later in life so you likely have time to plan for them.

Below are 9 ages to pay attention to when thinking about your retirement plans.

Age 50: Catch up Contributions.

We often come across people who have the ability to max out their employer sponsored retirement account or IRA, but are not doing so simply because they aren’t aware of the rules, or not paying attention to the limits.

At age 50 you are allowed to increase your retirement savings through what are called “catch-up” contributions. Basically the IRS recognizes you may be in your peak earning years and not yet saved enough for retirement. The catch-up contribution is meant to encourage you to sock away more dollars in your tax advantaged savings accounts.

The rule applies to 401k, 403b, 457, IRA, Roth IRA, SEP IRA, and other various retirement savings plans.

For Traditional, Rollover, and Roth IRAs the 2022 catch-up contribution is $1,000.

For 401k, 403b, 457 plans the 2022 catch-up amount is $6,500.

For SIMPLE Plans the 2022 catch-up is $3,000.

Age 55: The Rule of 55

A lesser known rule that applies to 401k and 403b accounts. If you were to separate service (Retire, quit, get laid off, get fired) after you have already turned 55, you can withdraw from that retirement account and avoid the 10% early withdrawal penalty. The key here is that you are drawing from the retirement account that was active with the employer when you left your job.

For those considering retiring between the ages of 55 and 59.5 it may make sense to take old retirement plans and even your traditional or rollover IRA and roll those into your current 401k or 403b plan. This of course depends on whether or not your plan allows for “roll-ins.”

Age 59.5: No more Tax penalties for drawing from your Retirement Accounts

The IRS institutes a 10% tax penalty on top of income taxes for early distributions from retirement accounts. Early essentially means any time before age 59.5 years old. If you’re anticipating retiring after that, then this may not be a big deal for you. If you have been diligent enough in saving for an early retirement then this rule is very important. Income tax and a tax penalty represent a significant haircut on money you’re relying on for living expenses, especially if your savings are your only source of income.

You can get around the tax penalty through something called a 72(t) distributions, but those rules are complex and the strategy should be considered as a last resort. For now if you want more information on 72(t) distributions here is some info on the topic from the IRS: Substantially Equal Periodic Payments

62: Social Security Early Benefit

This particular rule is fairly well known, but the IRS allows you to start drawing your Social Security Retirement Benefit as early as age 62. The caveat is you take a steep discount from what you would get at your full retirement age which is between ages 66-67 depending on the year you were born.

How much of a discount? Again it depends on when you were born, but your benefit could be reduced by as much as 30% if you’re drawing your own benefit. If you are drawing a spousal benefit at age 62 it could be reduced as much as 35%.

What to find out based on your own age? Here’s a link to the Social Security Website where you can find out: Retirement Age Calculator and Benefit Reduction Amount

Age 65: Medicare

Maybe we should make this 64.5, but at 65 you are eligible for Medicare which is Government health insurance for individuals over age 65. The reason I say 64.5 is because that’s when you should start your enrollment. You may be covered under another plan and may even plan to continue working beyond 65, but if you don’t enroll (whether you plan to use the benefit or defer while using your employer benefit) you will end up with a late enrollment penalty.

The late enrollment penalty applies to Part A, B, and or D. and is an additional percentage added onto your premium payments.

The penalty for Part A is 10% for each year you are late for enrollment and you pay the penalty for twice the number of years you were late.

Part B is 10% for each year as well, but it’s a lifetime penalty meaning your premium is increased for the rest of your life and won’t go back down.

The same is true for Part D, however the lifetime penalty is 1% for every month you’re late to enroll.

This is by no means a comprehensive discussion on Medicare enrollment and penalties. For additional information on this topic start here: Avoid Late Enrollment Penalties

66-67: Full retirement Age

Your full retirement age for Social Security depends on the age you were born, see the chart below.

70: Maximum Social Security Benefit

If you can wait, it often makes sense to delay taking your Social Security Benefit later. The reason is because you receive a roughly 8% increase to your benefit for each year you delay drawing after your full retirement age until age 70 when there is no longer any benefit to delaying any longer. That said, there are plenty of circumstances where it makes sense to draw at a different age. Your decision on when to draw should always be considered within the context of your overall retirement plan as well as your partner’s retirement plan.

Age 72: Required Minimum Distributions

This is your RMD age. Essentially this is Uncle Sam telling you that you must take a minimum amount of money out of your retirement accounts (except Roth IRAs) every year moving forward for the sake of paying taxes. Most of the time this is for tax-deferred money which means when you contributed to your retirement account you didn’t have to pay any tax on those dollars, you were granted the opportunity to defer those taxes until later. Not only do you pay tax on the income you deferred by contributing to the account, you also pay tax on the earnings of those original contributions, thanks Uncle Sam!

So, how do you determine how much you have to take as a distribution? The calculation is basically the value of the account on 12/31 of the previous year divided by your life expectancy based on the Uniform Lifetime Table. As a percentage this starts at 3.65% of the value of your retirement account for your first RMD as of 2022. Keep in mind these factors will change from year to year so if you’re reading this after 2022 you can expect the percentage to be slightly different.

Here is a link to the IRS website for detailed information on RMDs: Retirement Topics — Required Minimum Distributions

85: No Longer Eligible for Life Insurance or Long Term Care Insurance

Well there really is not a universal age that insurance carriers will stop offering Life Insurance policies or LTC policies, but you will be hard pressed to find one after the age of 85, and in many cases age 75. Generally, we don’t see this as much of an issue as life insurance likely isn’t needed at this time and would be cost prohibitive where the premiums would not make sense. For Long Term Care the same can be said of cost prohibitive premiums at that age.

So why include this… There are some individuals who have the enviable position of having so much money they want to use insurance strategies to minimize the taxation of their wealth when they pass money down to future generations and life insurance can be used as a vehicle to help accomplish this. We are hopeful that those individuals have done their estate planning before age 85.

That sums up some of the key retirement ages. There certainly are more age specific items to be aware of when it comes to your finances, but in the context of retirement planning we find these to be broadly applicable to most people.

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None of the information in this document should be considered as tax advice.  You should consult your tax professional for information concerning your individual situation. Tax, Social Security and Medicare services are not offered through, nor supervised by, The Lincoln Investment Companies.