Retirement planning is a complex topic. There are a lot of rules and a lot of variables. Planning far into the future involves uncertainties that complicate planning and reduce the likelihood of precisely hitting your target. Individual circumstances and risk tolerance drive many of our decisions.
Or, in far too many cases, need drives our decisions. For example, a person may invest outside his or her normal risk tolerance rather than further reduce his or her retirement expectations.
But within all of this complexity, there is a degree of certainty. This certainty is grounded in the rules, many of which are age-based. There are a variety of key ages that are important to be aware of and understand the implications of as you prepare for retirement.
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Age 55 is often glossed over as insignificant in retirement planning. This may be because the majority of people need to work well past 55 to be able to afford to retire comfortably. But for those who can retire early, age 55 is important. It is generally the earliest you can take distributions from a qualified plan, such as a 401(k) or 403(b), without incurring the 10-percent premature withdrawal penalty. This exemption is provided under IRC 72(t)2(A)(v).
There are a few important things to know about this age. For one, the age 55 rule is actually 50 for most people in law enforcement, the Coast Guard, and a small handful of other occupations.
Plus, this exemption applies only to those separated from service during or after the year they turn 55. For example, if you leave your employer at age 56, the exemption applies. But if you leave your employer at age 53, it doesn’t.
Be aware that a good financial adviser can offer you options for how to deal with this if you’re planning to retire before you hit 55. The exemption also doesn’t apply to the self-employed. Last, also be aware that it is limited to qualified plans and cannot be used for withdrawals from IRA accounts.
While age 55 is glossed over, 59½ is heralded as the holy grail of retirement ages. And it is certainly an important factor in much retirement planning. Age 59½ is the age at which you can take distributions from your retirement plans without incurring the premature withdrawal penalty.
There is some exception to this rule for 2020 as part of the CARES Act. Individuals who meet certain criteria may take up to $100,000 from an IRA, employer-sponsored retirement plan, or other defined contribution plan, without incurring the ten percent premature distribution penalty.
The criteria include you or your spouse being diagnosed with COVID-19, you were furloughed or laid off, or experienced a loss of income as a direct result of Covid-19.
The distribution will be included in income across the next three tax years, one-third per year, unless you choose otherwise. CARES distributions from qualified plans are not subject to the mandatory 20 percent federal tax withholding. Those taking distributions should consult with a tax professional and be aware of the impact on their taxes and plan accordingly.
The regular, non-CARES rule is pretty open and includes IRAs, as well as qualified plans. You don’t have to be separated from service to avoid the penalty, although you may or may not be able to take an in-service distribution, depending on your plan.
This is an age to view with caution. As with many things, just because you can doesn’t mean you should.
That uncertainty we talked about earlier suggests that most people should delay beginning distributions from their retirement plans to the fullest extent possible. More money later gives you more options.
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Age 62 is generally the earliest you can collect Social Security. If you are a widow or widower, this is generally age 60. Again, just because you can doesn’t mean you should. If you plan on working past age 62, you may have a reduction in benefits if you earn over a threshold. And your benefits are reduced by taking them prior to your Social Security full retirement age. More on that in a minute.
Sixty-five is the age at which you become eligible for Medicare and will need to make a couple of decisions regarding your health care options.
How to take Medicare (traditional versus Medicare Advantage [Part C]); what to do about a prescription plan (Part D); and whether you should couple traditional Medicare with a Medicare supplement plan are huge decisions that will affect your health care for the remainder of your life. It is imperative to do your research. For many people, it is appropriate to consult someone who is knowledgeable in these areas.
Age 67 (or a Little Earlier)
Sometime between age 65 and age 67, you reach what Social Security calls your full retirement age. If you were born in 1937 or earlier, your full retirement age is age 65. For those turning 65 in 2020, full retirement age is 66 and two months. For those born in 1960 or later, it's 67.
This age is simply the one at which you can receive your full Social Security benefit, without reduction. It isn’t more complicated than that. You can still retire at any age and begin collecting as early as age 62. But while someone whose full retirement age is 65 would see his or her benefit reduced to about 80 percent at age 62, someone whose full retirement age is 67 will see a reduction to about 70 percent. The bottom line is that current and future retirees get less benefit than they would have had full retirement age not been moved past age 65.
Your benefit can grow beyond what you get at your full retirement age. If you’re going to keep working, you may wish to delay receiving benefits.
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Seventy is a key age because any retirement Social Security benefits you receive will no longer be reduced if you earn over the threshold. Earn away and collect your full benefit.
The IRS loves this birthday of yours. After age 70½, you must take required minimum distributions (RMDs) from your retirement plans. The IRS will no longer patiently wait for you to expire but will tax some of your money now, thank you very much.
Note that your Roth accounts are not subject to RMDs. The IRS gets no money off of them, so there is no urgency to begin collecting.
Actually, your first RMD needs to be taken by April 1 of the year after you turn 70½. After that, you need to take it by each December 31. For many people, the simple planning here is to take your first distribution the year you turn 70½ so you don’t end up being taxed on two distributions the next year.
RMDs are reasonably complex. Again, it is important to do your homework thoroughly or to consult a knowledgeable professional who can guide you through the process.
Additionally, as part of the CARES Act, RMDs are waived for 2020. Those who have taken distributions also may have the opportunity to put the money back into the retirement account from which the distribution was made, negating the distribution.
Your Retirement Planning Timeline: Putting It All Together
Understanding how the various ages affect your retirement planning timeline can help you make good financial decisions. While this article can serve as an introduction, it is important to note that many of the rules are complex and specific and to know the details of how they apply in your particular case.
This is your introduction, but you will need to dig deeper, depending on your situation.
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There is a common misconception that you must be 59½ to retire because of the premature withdrawal penalty — or at least 55 if you are retiring with money in a qualified plan. This isn’t true. You have other options to access retirement funds without penalty.
When you can retire is based on the retirement savings you have built and what you plan on doing in retirement. The rules affect how and when you access the money. But you can retire at any age — if you can afford to.