Key Milestones For Planning Your Retirement
The road to retirement is a long one, and, like any journey, it can help to have a few key milestones along the way to gauge progress. While individual retirement plans and goals are unique, based on income, family situation, and desired lifestyle, most follow a common path with similar markers. Retirement milestones are based on age, as well as important dates and deadlines related to Social Security benefits, Medicare, and tax-advantaged retirement plans.
Side note: if you are a business owner, your primary investments are going to be in your business and you can turn it into a self-generating machine, running without you for extended amounts of time. At first, this may be just to take vacations or handle emergencies, but eventually you’ll want to have the freedom to retire entirely, sell the company, or transfer it to the next generation. If this is your situation, your retirement milestones will be different than those shared here.
However, for those who work for someone else, or whose income is otherwise dependent on being employed, consider these milestones on your road to retirement.
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 you can. Time, tax breaks, and compounding interest all add up; 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.
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. If that’s not possible, then save as much as you can, and at least enough to get the full benefit of your employer’s matching contribution if one is offered.
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 may 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. This means you should be taking advantage of the extra income and maxing out your contributions to tax-advantaged retirement accounts. The IRS even helps out here, allowing 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, equaling a total limit of $7,000 annually.
At this point, you are likely nearing retirement age and will have less tolerance for risk. You may want to consider revisiting your retirement portfolio – it may be the right time to start shifting away from investing for growth, focusing instead on a more conservative strategy. And, If you haven’t already, it is probably time to find a financial advisor who can support you in planning for and reaching your retirement savings goals.
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.
You are still required to pay income taxes on any withdrawals from your 401(k) or 403(b) in the year they are taken. IRAs are also not eligible for this exception – for those accounts, you must still 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 without the 10% early withdrawal penalty. These are the years of freedom – you are welcome to make penalty-free withdrawals from your retirement account starting at this age, but you are not yet required to.
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. You may want to plan ahead, setting aside some of the withdrawal to pay taxes.
Age 62: Social Security eligibility begins
62 is the earliest age you can begin claiming Social Security retirement benefits. However, the earlier you claim your Social Security, the more reduced your monthly payment may be. Depending on your date of birth, your monthly benefit can be reduced by as much as 30% if you begin taking it immediately. Conversely, your benefit amount increases each year that you wait to claim your benefits up until you turn 70.
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. The dates below show your full retirement based on your birth year.
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
- 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 should you choose to enroll later on.
If you plan to continue working after age 65 and are covered by your employer’s health insurance plan (or your spouse’s), speak with the employer and your benefits coordinator to see how signing up for Medicare would affect that coverage. Depending on the size of the employer, you may be entitled to a special enrollment period of up to eight months after the employer-tied coverage ends to sign up for Medicare with incurring a penalty.
Age 70: File for Social Security, if you haven’t already
As previously mentioned, 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 age 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 – if you miss one, you could owe a penalty of up to 50% of the amount you should have withdrawn. The amount you’re required to withdraw will depend 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.
Consider What’s At Stake
When preparing for your senior years, it’s not enough to simply hope for the best. You should treat retirement planning as if your life depended on it—because it does. Without an effective plan, you risk a future of financial struggle, limited options, dependence and stress. The stakes could hardly be higher.
The best way to ensure a comfortable retirement is to start planning and saving as soon as possible. It is also critical to seek the guidance and support of professionals who can help you develop strategies to maximize your investments and savings, while minimizing taxes and avoiding common pitfalls. If you need help finding a financial advisor, just ask – we can introduce you to the experienced professionals we trust most. With their support and ours, you will have peace of mind that you and your family will be well-protected and well-planned for no matter what. Contact us today to get started.