- Milad Taghehchian, CFP(R)
8 Important Ages for Retirement Planning
Thinking about where you want your life to be in the future – whether 30 years from now, or just 10, can be stressful. Most people don’t even know where they want to be in 1 year – and if you’re anything like me, you don’t even know what you’re doing next week! However, there are important times in life when we have to step back and make plans for the future. Not just for our own benefit, but for the sake of our children and our future generations. The following are 8 important ages to adjust our plans for the future. Right Now! It’s never too late, or early, to start planning. The time value of money is perhaps the most important concept in retirement planning. A dollar today is worth more than a dollar in the future, simply because of its earning capacity. To illustrate this, I’ve devised a simple example. Let’s say someone offers you the option to receive a gift of $100 today, or $100 a year from now. From a practical standpoint, most of us would prefer the money today. But let’s see the math behind it. Let’s assume an interest rate of 3% - a very conservative one. If I take the $100 today and invest it for a year, I should have $103 at the end of the year ($100 multiplied by 1.03). On the other hand, if I were to defer the $100 gift for a year, it would be worth $97.08 today – which is less than the $100 offered to me today! This is because we divide $100 by 1.03 to get the value in today’s dollar amount – we’ve discounted the future amount to the present value. I would obviously prefer to have $103 a year from now rather than $100. Using this concept, we can see the value of planning for retirement as early as possible. Saving a lot of money early on is incredibly advantageous for 2 reasons: firstly, your money gets to grow for longer, and therefore more, and secondly, the more you save early on means the more your money can grow by. A person who saves $50,000 by the time they’re 30 could grow their money to $500,000+ by retirement with minimal (actually, no) effort on their part! Age 50 This is when the IRS officially considers you “catching up” on your savings. In 401(k) plans, you can now defer taxes for up to $24,000/yr. in savings – and the same applies to 403(b) plans as well as government thrift saving plans. On your IRAs, you can now contribute up to $6,500/yr. In contrast, younger savers can only max out at $18,000 and $5,500. Age 55 Not a particularly important age for many, but relevant to 401(k) owners and many federal employees. If you have a 401(k) or Thrift Savings Plan and leave your employer once you turn 55, you can withdraw money from your retirement account associated with that job without incurring a 10% early withdrawal penalty. Not every plan is the same, and you should check the documents and make sure this applies to you. You will still be taxed on the money being pulled, but we assume you’ve left your employer and are not earning much this year, so the burden is not big. Age 59&1/2 At this age, you no longer pay a 10% early withdrawal penalty on your 401(k) or IRA withdrawals. However, each plan is different – some 401(k)s will charge a fee if you’re still with your employer, and IRAs could be held by institutions that charge their own fee if you withdraw before maturity. Always check the details of your personal plans! Age 62 You now qualify for Social Security payments – but with a big caveat. The earlier you sign up for SS payments, the less these payments will be. In creating these laws, Congress created flexibility for people who can wait until their full retirement age (usually 67) and incentivized them to wait by increasing their payments. Under dire circumstances, you may need to receive these payments as soon as possible, in which case it makes sense to sign up for SS when you turn 62. But if you expect to live well past your 70s, it makes sense to wait until your full retirement age and receive as much as possible! Age 65 You can sign up for Medicare 3 months before you turn 65, and it covers you beginning in the month you turn 65. The only prerequisites are your age and your ability to pay. Age 67 As I just mentioned, it makes sense for most people to wait until their full retirement age to claim SS benefits. This age is 67 for anyone born in 1960 or later. These payments will be bigger, and if you expect to live much longer, you will benefit from a bigger SS check every month. The tradeoff is that you do not receive any payments from ages 62 to 67, but most people simply continue working during this time so that they can benefit in the future. Age 70 For every year after your full retirement age (usually 67) that you defer your SS payments, your payments go up by 8%. For most people, it makes sense to fully retire at 67, but some decide to keep working until their 70s and don’t exactly need the SS benefits just yet. If you fall in this category, it might make sense to wait until age 70 and grow your monthly benefits even more. However, past age 70, there is no additional benefit in waiting and you’re simply throwing money away – so start claiming your benefits! At age 70&1/2, you’re forced to begin taking distributions from your IRAs and prior employer 401(k)s if you haven’t done so already. You have to take 3.65% of the value of your retirement assets. And there you have it, folks. Plan today so that you can live a comfortable retirement – or at last one free of monetary concerns.
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