The road to retirement is a long one, and as with any journey, it helps to have a few key milestones along the way to help gauge your progress. While your individual retirement plan and goals will be unique to your income, family situation, and desired lifestyle, most Americans share a number of common retirement milestones.
That said, if you are a business owner, your primary investments are going to be in your business, so you can turn it into a machine that can run without you for extended periods of time.
Age 21 to 49: Make Savings a Habit
The key to having a comfortable retirement is by saving as much as possible as early in your career as possible. Time, tax breaks, and compounding interest all add up, and by getting into the habit of saving when you are young, it will be exponentially easier to reach vital retirement goals as you get older.
With this in mind, one of the most important things you can do at this age is to take full advantage of employer-sponsored retirement accounts, such as 401(k)s, 403(b)s, IRAs and other tax-advantaged plans, especially if your employer offers a match. A common rule of thumb is that you should save at least 15% of your pre-tax income each year.
For 2022, you can contribute up to $20,500 to your 401(k) or 403(b) plan, while the contribution limit for both traditional IRA and Roth IRAs is $6,000. Since you are likely to be in the workforce for several decades, you’ll have a higher tolerance for market volatility and risk, so you will likely want to consider investing with a focus on maximizing growth, rather than taking a more conservative approach.
Age 50: Catch-up Contributions Begin
Once you reach 50, you are likely in your peak earning years, so you should be maxing out your contributions to tax-advantaged retirement accounts. To help you achieve this, the IRS allows those age 50 and older to make an extra annual “catch-up” contribution.
In 2022, the catch-up contribution limit for a 401(k) or 403(b) is $6,500, which gives you a total contribution limit of $27,000 annually. For traditional IRAs and Roth IRAs, the catch-up contribution is capped at $1,000, which equates to a total limit of $7,000 annually.
Age 55: 401(k) Withdrawals Possible Under the Rule of 55
Although you generally must wait until age 59½ to make withdrawals from your 401(k) without incurring a 10% penalty, the IRS allows for a “separation of service” exception for certain workers. Also known as the Rule of 55, if you quit, were laid off, or otherwise terminated from your job during or after the year you turn 55, you can take withdrawals from your 401(k) or 403(b) penalty-free from the account associated with that job.
That said, you are still required to pay income taxes on any withdrawals from your 401(k) or 403(b) in the year they were taken. Moreover, IRAs are not eligible for this exception, and for those accounts, you must wait until age 59½ to take withdrawals without any penalty.
Age 59 1/2: Penalty-free Retirement Account Withdrawals Begin
Outside of the “separation of service” exception, this is the age when you can begin taking withdrawals from your retirement account, such as a 401(k), 403(b), and IRAs, without the 10% early withdrawal penalty. While you are free to make penalty-free withdrawals from your retirement account starting at this age, you are not required to make any withdrawals until age 72.
Though not subject to a 10% penalty, all withdrawals from your retirement accounts are subject to federal income taxes in the year you make them. Given this, you may want to consider setting aside some of the withdrawal to pay taxes.
Age 62: Social Security Eligibility Begins
This is the earliest age you can begin claiming Social Security retirement benefits. However, if you take Social Security early, your monthly benefit will be reduced by as much as 30%, depending on your date of birth. Conversely, your benefit amount increases each year until you start claiming benefits, or when you reach age 70, whichever comes first.
The age at which you are eligible for 100% of your Social Security benefit is known as your full retirement age. The full retirement age used to be 65, but in 1983, the law changed and gradually pushed the full retirement age up to 67, depending on the year you were born. As such, the dates below show your full retirement based on your birth date.
Year of birth: Age to receive full Social Security benefits
1943-1954: 66
1955: 66 and 2 months
1956: 66 and 4 months
1957: 66 and 6 months
1957: 66 and 6 months
1958: 66 and 8 months
1959: 66 and 10 months
1960 or later: 67
Age 64 3/4: You can enroll in Medicare
You can enroll in Medicare at any point during the seven-month period that begins three months before the month you turn 65. Medicare is our government’s basic health insurance program for those age 65 or older.
Unless you are still covered by the health insurance of your employer or your spouse’s employer, you should consider enrolling in Medicare during this seven-month window to cover expenses related to inpatient hospital care, doctor visits, outpatient care, and prescription drugs. If you do not enroll during this initial window, you may have to pay higher premiums for life should you choose to enroll later on.
Age 65: Medicare Begins and You Can Enroll in Medigap
If you enrolled in or are receiving Social Security, you qualify for Medicare coverage on the first day of the month in which you turn 65, regardless of whether or not you are retired. On that same day, the six-month enrollment window for the Medicare supplemental insurance known as Medigap also begins. Medigap is private insurance that helps you cover a portion of the out-of-pocket copays and deductibles of traditional Medicare.
Age 70: File for Social Security, if you haven’t already
As mentioned earlier, the longer you wait to claim Social Security between your full retirement age and age 70, the higher your benefits will be. In fact, your benefits increase by 8% for each year you wait between your full retirement age and 70. But once you reach 70, your benefits no longer increase, so don’t put off filing for Social Security past this age.
Age 72: Required Minimum Distributions (RMDs) Begin
Once you reach 72, you are required by law to begin taking distributions from tax-deferred retirement accounts, such as a 401(k), 403(b), and traditional IRA. These are known as required minimum distributions (RMDs), and your first distribution must be taken by April 1 of the year you turn 72. Thereafter, annual withdrawals must be taken by December 31 of each year.
Note: RMDs don’t apply to Roth IRAs, because contributions to these accounts are made with after-tax dollars.
It’s extremely important to stay on top of your RMDs, because if you miss one, you could owe a penalty of up to 50% of the amount you should have withdrawn. The amount you must withdraw for your RMD depends on the balance in your account and your life expectancy as defined by the IRS.
To calculate your RMD, visit the IRS website, and refer to the table in IRS Publication 590-B. From there, locate your age in the table, and find the “life expectancy factor” that corresponds to your age. Then, divide your retirement account balance as of December 31st of the previous year by your current life expectancy factor. This should give you the amount of your RMD.
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While all of these recommendations relate to you saving enough for retirement, your best bet to ensure your retirement years are as plentiful as possible is to create a reality with your work life that you never have to retire from. Instead, consider how you can invest in education and training that will support you to happily contribute your skills and continue to get paid through the rest of your life. We will offer you the support and guidance you need at Hurban Law.
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