Planning your retirement? Some birthdays are bigger than others


Peter Neeves

Peter Neeves

Blog author Peter Neeves

Published September 17, 2018|5 min read

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Planning far into the future involves uncertainties that complicate planning, especially when it comes to retirement. You've probably heard that it's best to start saving early and that you can take more risks when you're younger, as retirement is further away. But what ages are really notable in retirement planning? Here are some key birthdays to pay attention to as you map out your retirement timeline.

Age 55

Age 55 is often glossed over as insignificant in retirement planning, but it shouldn't be. It is notable because 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% premature withdrawal penalty. This exemption is provided under IRC 72(t)2(A)(v). (Note: This rule changes to 50 for most people in law enforcement, the Coast Guard and a small handful of other occupations.)

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. A good financial adviser can offer you options if you plan to retire before you hit 55. Self-employed? This exemption doesn't apply to you.

Note: This is limited to qualified plans and cannot be used for withdrawals from IRA accounts.

Age 59 1/2

While age 55 is glossed over, 59 1/2 is heralded as the holy grail of retirement ages. And it is certainly an important factor in much retirement planning. This is the age you can take distributions from your retirement plans without incurring the premature withdrawal penalty. The rule here 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.

Be cautious: 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.

The point here is: Retiring later is great for your wallet. But what if you hate working? Find out here.

Age 62

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.

Age 65

This is when you are eligible for Medicare and will need to make a couple of decisions regarding your health care options. You'll want to find out how to get Medicare, do you go for traditional or 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.

It is imperative to do your research. For many people, it is appropriate to consult someone who has experience in these areas to help them choose the best option for their situation.

Already have Medicare but want to change your elections? You can read more about Medicare open enrollment here.

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 this year, full retirement age is 66. 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 their benefit reduced to about 80% at age 62, someone whose full retirement age is 67 will see a reduction to about 70%. 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.

Age 70

This 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.

Age 70 1/2

The IRS loves this birthday. After age 70 1/2, you must take required minimum distributions (RMDs) from your retirement plans. The IRS will tax some of your money now. 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.

Your first RMD needs to be taken by April 1 of the year after you turn 70 1/2. 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 70 1/2 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.

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. 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 situation.

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. You may need to learn the rules or get guidance to be able to spend your retirement assets without penalty. However, with proper planning, the rules are not a hindrance. Plan ahead and get the help you need to be able to enjoy a stress-free retirement — at any age.

Make sure you check out this explainer on what health care will cost you in retirement.

This article originally appeared on CentSai.

Image: Khosrork