7 Milestone Birthdays That Affect Your Retirement
Remember as a kid how excited you were for your birthday to come? It couldn’t arrive fast enough! Presents, cake and everyone making a big deal of you was great!
You probably couldn’t wait to turn 13 and finally become a teenager. Then maybe you looked forward to 16 so you could get your license. 18 to vote. At 21 you could legally drink and 25 got you a discount on your auto insurance.
After that, you may have spent the rest of your time wishing you were 25 again.
It’s in our nature to look forward to milestones. After all, they are a rite of passage and a big achievement.
Did you know you’ve got some retirement milestones to look forward to?
Being unaware of these milestones will cost you money!
Milestone #1 – Age 50
In 2002, the government changed the rules on contributions to retirement plans and IRA’s. They allowed a “catch-up” provision for older individuals. If you are age 50 or older, you may now contribute an extra $1,000 to your IRA’s and an additional $5,500 to your 401k’s in 2009.
This is a great deal for those looking to sock some extra cash away for retirement!
Milestone #2 – Age 55
Age 55 is a big deal for those looking to retire early for the simple fact that if you retire or separate from service the year you turn 55 or after, you are allowed to take 401k distributions without getting whacked with a 10% penalty!
Let me say that again…NO PENALTY for early retirement distributions. This is known as the “Age 55 Exception”.
Get this – if you roll your money to an IRA, the deal is off the table. That’s right, you must leave it in the 401k, but you are allowed to take out as much as you want, whenever you want.
Milestone #3 – Age 59 1/2
I doubt most of you celebrate Half Birthdays, but this is one you’ll want to throw a party for!
This is the traditional age in which you can withdraw your retirement money without fear of Uncle Sam hitting you over the head with a 10% penalty for pre-mature distributions.
Milestone #4 – Age 62
62 is a big age as well for the simply because you can now qualify for Social Security benefits. It doesn’t mean you have to take them or even that you should take them, but you at least have the option available to you. Don’t forget it will be a reduced benefit, but a benefit nonetheless.
Milestone #5 – Age 65
At this age you are now qualified to take Medicare, which is social insurance including two main parts. Part A covers hopsitalization and Part B acts as your medical insurance.
If at this point you are not receiving Social Security benefits then you need to apply for Medicare and will want to do that three months before you turn 65.
Milestone #6 – Age 66-67
If you were born between 1943 and 1954 then your full retirement age (FRA), or the age in which you can collect 100% of your entitled Social Security benefits is age 66.
For those born in 1955 you have to wait an additional two months. The government adds two more months to the waiting period for each year until 1960 (i.e. if you were born in 1958, your FRA is age 66 and 6 months).
If you were born in 1960 or beyond your FRA is age 67.
I hear a lot of people tell me “I can’t retire until 67”. What they usually mean is they can’t collect full Social Security benefits until age 67. You can retire whenever you want, you just won’t get your full benefits until then.
Milestone #7 – Age 70 1/2
Here is another one of those Half Birthdays, however, this one doesn’t justify much celebration.
In the year you turn 70 1/2 good ol’ Uncle Sam says you MUST start pulling money out of your IRA’s or 401k’s.
What? Surely that’s a typo right? Sorry to bear bad news, but you MUST start pulling money out of your retirement plans.
In effect, Uncle Sam says to you, “Great job saving that big chunk of money in your 401k and deferring the taxes for all these years, we love you, now it’s time to pay the Piper, which is why we love you even more at this age!”
What do I mean by MUST? Well, if you want to try to get around pulling money out and paying taxes on it, just realize that you will be subject to a 50% penalty on your distribution!! Ouch!
This is known as RMD or Required Minimum Distributions. There is a special formula based on life expectancy that the IRS uses to determine your RMD. See these worksheets at the IRS website for more info.
One last note on the 70 1/2 rule. This only applies to your pre-tax retirement accounts. In other words, money that you have not previously paid taxes on. So, your Roth IRAs (which consist of after-tax money) do not apply when discussing RMDs.
Now that you know about these important milestones what should you do about it?
If you are unsure how much you need for retirement and are trying to decide where to save more money you may want to keep the 70 1/2 rule in the back of your mind.
Regardless of age, it makes sense for you to look into whether a Roth IRA is right for you. You might be able to contribute to them OR you might be able to convert existing pre-tax money to a Roth IRA.
If you are 50 or older that’s easy – you should be socking away as much as you can for your retirement.
If you want to retire early you might be able to take advantage of the age 55 exception and early Social Security Benefits.
Knowledge is key to making the right decisions when it comes to retirement. Don’t let your birthdays come and go without taking advantage of opportunities that exist for your retirement.
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