While we all think of retirement as a particular date, retirement actually consists of a timeline of events that happen both before and after the day you stop showing up at work. In fact, these events could extend over a period of two decades or more. Knowing these six typical retirement planning timeline milestones can help you make better decisions about your retirement long before you get there.
Milestone 1: Age 50
The half-century mark is the perfect time to kick off your retirement planning in earnest. One important reason to start in your early fifties centers around long-term care insurance. Between ages 50 and 60, long-term care insurance premiums begin increasing drastically. Making this decision in your early fifties could be important; costs could become unaffordable if you procrastinate.
In order to make an informed decision on long-term care insurance, you’ll need to consider it in the context of all your cash flows by building a comprehensive plan. When you kick off your retirement planning in your early fifties, there’s plenty of time to account for the changes in cash flow that you’ll experience between retirement and age 72.
Starting your retirement planning at this age will also give you a reality check on whether or not your planned retirement date is actually feasible. If you’re a little behind, you give yourself a chance to start catching up before you walk away from work.
Milestone 2: Age 59-1/2
Age 59-1/2 is an important milestone for everyone with a retirement account. That’s the age when you can begin making withdrawals from those accounts without early withdrawal penalties from the IRS. You’ll still have to pay taxes on any withdrawals, but the 10% penalty goes away.
Of course, there are exceptions to the age 59-1/2 rules. These include substantially equal periodic payments and other means to access your retirement funds earlier. However, I see this milestone (effectively age 60) as the earliest reasonable date for most people to consider for retirement.
Milestone 3: Age 62
Your Social Security retirement benefits are on the menu starting at age 62. While widows and widowers may be able to apply for spousal benefits at age 60, this is the earliest that most people will be first eligible to receive this retirement income. Incidentally, age 62 is when most people begin taking their benefits.
You aren’t required to take your benefits at 62. You can choose to begin receiving them anytime between age 62 and age 70. Of course, the earlier you take benefits, the lower they will be. Choosing the date to begin your benefits can be a complex decision; hiring a financial planner can help tremendously.
Social Security timing can be complicated in the context of your larger financial picture. If you have longevity in your family, delaying benefits may make more sense. Pensions, any type of executive compensation benefits, your spouse’s Social Security benefits, and even stock sales could also affect your decision on when to start.
Taxes are also a factor in the timing of Social Security Since your benefits are means-tested, high-income years could push you into a different tax bracket or increase your Medicare withholding. Incorrectly timing your benefits could also potentially reduce your strategic planning options – such as partial Roth IRA conversions – in years where you would otherwise have lower income.
Milestone 4: Age 65
Your Medicare decision is an important point on the retirement planning timeline; in fact, you’ll want to make plans before you turn 65. If you plan to retire before then, then you’ll be forced to obtain private health insurance until you’re eligible. I’ve discussed a few of these options in a prior blog post. Also, be sure to check with your current doctors beforehand to ensure they accept Medicare patients.
Most retirees purchase a Medigap insurance policy instead of relying exclusively on Medicare for their retirement health insurance coverage. There’s also Medicare Supplemental Insurance available in lieu of Medigap insurance, although this is a less popular option. From a financial standpoint, you can expect your total health insurance expenses to go down, which may provide strategic financial planning opportunities.
Milestone 5: Age 70
If you haven’t already started your Social Security benefits, you’ll automatically be enrolled and begin receiving them at age 70. Ideally, you’ve done your Social Security benefits planning before you turned 62. If you’ve waited this long, it’s time to start enjoying those larger monthly checks.
Milestone 6: Age 72
Up until age 72, Uncle Sam allows you to save pre-tax money into your retirement accounts. Once you turn 72, you’re required to begin taking withdrawals from those accounts each year. These withdrawals are known as required minimum distributions (RMDs).
Every year as you get older, the percentage you’re required to withdraw grows slightly. If you live deep into your 90s, you may be required to withdraw over half of your account. The government doesn’t want those funds trapped in tax-deferred accounts forever, so that’s why these rules were created. Uncle Sam wants that sweet, sweet tax revenue.
RMDs will increase your taxes in retirement, so it’s important to leverage any low-tax years before they occur. You may be able to minimize taxes by taking withdrawals from different types of accounts or execute strategic planning opportunities such as partial Roth IRA conversions.
Up until the SECURE Act was passed in 2019, the age to begin your required minimum distributions was age 70-1/2. So, all of these milestones are subject to change. Depending on your situation, your retirement planning timeline may be somewhat different. However, understanding these six milestones of a typical retirement planning timeline can help you think ahead and make better decisions for your own retirement.
If you need help mapping out your retirement planning timeline, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.
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