Important Dates to Remember as You Approach Retirement
Every birthday is significant. However, when it comes to retirement, there are a few specific birthdays you’ll want to highlight as reminders to help boost your retirement income and avoid unnecessary penalties. Let’s dive right in…
Age 50: take advantage of catch-up contributions
When you turn 50, the IRS allows you to make annual “catch-up contributions”: additional contributions you can make above standard limits to your 401(k)s and IRAs. This feature is offered to encourage savings and help ease the financial burden of retirement, especially if you didn’t save enough when you were younger.
If it makes sense for your overall plan, you should take advantage of this benefit as the tax-deferred growth can help significantly boost your retirement savings. The IRS sets catch-up contributions and limits for eligible retirement plans on an annual basis. As of 2023, these are:
· IRAs: $1,000 catch-up contribution, meaning you can make a total contribution of $7,500 (limit of $6,500)
· 401(k)s: $7,500 catch-up contribution, meaning you can make a total contribution of $30,000 (limit of $22,500). This rule also applies to other workplace retirement vehicles such as 403(b)s, most 457s, and the government’s Thrift Saving Plan (TSP).
· SIMPLE 401(k)s: $3,500 catch-up contribution, meaning you can make a total contribution of $19,000 (limit of $15,500)
You should also know that catch-up contributions received a significant boost due to the Secure 2.0 Act, which was signed into law in December 2022: dictating an annual, inflation-driven adjustment for IRA catch-up contributions beginning in 2024. Then in 2025, employees between the ages of 60 and 63 will receive a “special” catch-up contribution limit for most 401(k)s and other employer-sponsored plans. More specifically, this equates to the greater of $10,000 or 150% of the standard contribution limit for 2024 (with the former also adjusted for inflation each year beginning in 2026).
Catch-up contribution limits for SIMPLE plans will increase by 10% starting in 2024, and beginning in 2025, account holders between the ages of 60 and 63 will receive a “special” limit as well: meaning the greater of $5,000 or $150% of the 2025 catch-up contribution limit for other eligible workers. This amount will also be adjusted for inflation on an annual basis.
Age 55: know the Rule of 55
As a general rule, if you withdraw money from your 401(k) (or 403(b)) account before the age of 59½, you’ll trigger an IRS tax penalty of 10%. The Rule of 55 allows anyone who is fired, laid off, or quits a job between the ages of 55 and 59½ (some public employees can qualify even earlier) to pull money out of their most current 401(k) or 403(b) and skirt this fee.
However, before you take any action (we’re not suggesting you do), know that you’ll still pay income tax on the money you withdraw. You’ll also need to check with your plan’s administrator as not all employers support early withdrawals—and some may require you to remove your money in one lump sum, pushing you into a higher tax bracket.
Keep in mind that if you find a new job, you can still take early withdrawals without penalty; however, these are limited to funds held in your new company’s 401(k) or 403(b) as you can’t use money from older accounts.
Your mid-50s
While individual situations differ—especially if you have a family history of illness at a young age—experts recommend you obtain a long-term care policy (as a stand-alone product or through your life insurance policy) in your mid-to-late fifties so you can lock in a lower premium.
There are several reasons for this, the primary being that you need to qualify for long-term care insurance: meaning only healthy individuals can buy coverage. The fact that many people begin experiencing a slight decline in health in their 50s helps explains why ~25% of people aged 60-64 who submit long-term care applications are denied (per recent data from the American Association for Long-Term Care Insurance). This number increases to almost 33% for those aged 65-69 and is significantly higher for those aged 70+
Another reason to buy a policy when you’re younger is that long-term care premiums are based on the age you apply. That said, you don’t want to purchase a policy too early—as those aged 70+ file more than 95% of long-term insurance claims. In other words, if you buy a policy in your 40s, you’ll likely pay premiums for more than two decades before you ever file a claim.
Age 59½: you can withdraw from your 401(k)
At age 59½, you can begin withdrawing money from your 401(k) and IRA accounts without incurring a 10% early withdrawal penalty. That said, if you don’t retire at this age, it’s best to leave your savings alone: especially since each withdrawal is still subject to federal income tax. Depending on where you reside, you are also sometimes subject to state taxes on withdrawals.
Age 62: you qualify for Social Security benefits
You can begin collecting Social Security at age 62. However, choosing to receive benefits before reaching full retirement age (the age at which you’re entitled to receive100% of your benefits) means your monthly benefit will face a permanent reduction. The current full retirement age for those born after 1959 is 67.
More specifically, Social Security benefits increase by approximately 7% each year between 62 and your full retirement age. Thereafter, this increase rises to approximately 8% each year between your full retirement age and age 70 (the age in which you’d maximize your Social Security benefits).
To illustrate, let’s assume the full amount of your Social Security benefit is $1,000 a month: the amount you’d receive if you wait until your full retirement age.
If you claim benefits at age 62, your benefit will decrease by roughly 30% to $700: meaning you’d miss out on $3,600 a year! Multiply that by five years (when you’d reach full retirement age) and that’s $18,000—per spouse! Alternatively, if you wait until 70, your monthly benefit would shake out to be about $1,266 a month.
Three months before age 65: Medicare enrollment begins
You generally qualify for full Medicare benefits upon turning 65—earlier if you have qualifying disabilities—based on your (or your spouse’s) employment record.
Most people have a seven-month Medicare sign-up enrollment period, with this window beginning three months before you turn 65 and ending three months after your birthday month.
A failure to enroll in Medicare during the specified enrollment period can increase your monthly premiums (despite what some may believe,Medicare isn’t free). Click here to read all about costly Medicare mistakes you should avoid.
Age 73: RMDs
If you’re saving money in a 401(k) or traditional IRA for your retirement, you probably know your taxes are perennially deferred on these accounts—likely over many decades. Unfortunately, the government will inevitably look to collect its fair share of taxes at one point or another. For many retirees, this time will arrive when required minimum distributions (RMDs) eventually hit their plans. Simply put, RMDs are the minimum amount of money one must withdraw from specific tax-deferred retirement accounts beginning at age 73 (as of January 1, 2023). Starting in 2033, this stipulation will climb to age 75.
In sum: key milestone dates to remember
As you can see, it’s critical to familiarize yourself with these age-related milestones as they impact when you can retire, use your retirement funds without penalty, and enroll for various government benefits.
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
