Thinking about the rest of your life — especially in terms of
your finances — can be a scary but exhilarating proposition. Assuming
it turns out to be as long of a time period as you would like it to be,
thinking about it all at once can be daunting. However, breaking your
life into nine stages can help you compartmentalize
your retirement-planning process so you can take your goals one step at a time.
This Very Moment
The first
important age in planning out your retirement is right now. Whatever age
you are at this moment, regardless of how close you are to the
transition, or how behind you might feel in your savings, there are
definitive steps you can take
to get organized and create a roadmap to where you want to go. What do
you want the rest of your life to look like? Don't know? Well, you might
have an idea but it depends on a few scenarios that aren't known yet.
Maybe you will downsize and move wherever the grandchildren are, or
maybe you will stay in the home and fix it up. Think of steps you can
take
that can serve you many different ways.
Would paying the house off benefit your future in both of those
scenarios? If so, perhaps that is a place to start. Look for other
commonalities among your goals.
Age 50
Turning 50 has its own issues, separate from
retirement planning.
But for many people it's an attention-getter. You have now entered what
the IRS bluntly calls the "catch up" phase of your saving career.
Workers at this age or older can now defer taxes on as much as $24,000
in 401(k) plans, 403(b) plans and the federal government thrift saving
plan, and also $6,500 in an IRA or Roth IRA. This is instead of $18,000
and $5,500 respectively for younger savers. However, check with your tax
adviser, financial adviser and employer's human resources department
before increasing your savings level. There are a variety of
restrictions based on your filing status, existence of a retirement plan
at work, total income, and even the type of retirement plan your
employer offers that collectively may limit how much, or how tax
deductible those contributions can be.
This is also the age that
you might start receiving some invitations in the mail for a free dinner
at your local steakhouse, hosted by financial advisers or estate
attorneys. This isn't a coincidence. Thanks to all the data available
about you, professionals who conduct these seminars have the ability to
target their invitees by age — and 50 is often a starting point.
Attending these events isn't necessarily a bad thing, and sometimes can
be very educational. Just always check the background of the presenter
and get multiple opinions on your potential decisions.
Age 55
This
age might not come to mind as a particular milestone for newfound
options or potential retirement. However for many 401(k) owners and
federal employees, it has a unique characteristic. The way this works is
if you have a 401(k) or Thrift Savings Plan and leave that employer
after reaching age 55 you can take withdrawals from the retirement
account associated with the job you most recently left without having to
pay the 10% early withdrawal penalty. Again, always check the plan
document, your former or current employer's human resources department
and a tax advisor — but for many plans this feature exists. For planning
purposes, this simply provides a level of flexibility. Say you have a
built-up balance in one of these accounts and you are looking for new
work or deciding your next career move, and if you could just get one
particular
debt like a mortgage paid off,
you would have a lot more freedom. Despite it being considered income,
you could pull funds without being charged an extra penalty. The income
tax may not be too burdensome considering this scenario implies you may
not be working at the time. If you are, then it might not be a fit since
the withdrawal plus your earnings all flow to the tax return. And as is
often asked, you have to make it to the calendar year you are scheduled
to turn 55. You can't leave the job at 53 and then wait until 55
expecting to avoid the penalty. So if you are still working there and
you are ready to tell the boss how you really feel but you have three
months to go, perhaps it's worth putting in the time for your future
planning options.
Age 59½
This is the age
at which you no longer have to pay a 10% early withdrawal penalty on
401(k) and IRA account distributions. Obviously this is important
because if you need the withdrawals for monthly income, or one-time
payments, you will pay less tax when taking a withdrawal. It is also the
age you can access non-qualified annuity balances without a 10%
penalty. This is only for tax purposes, though. Any of these accounts
may be held at companies that still enforce a charge for withdrawals due
to your relationship with them. Annuities can carry a surrender charge
period, 401(k) may not allow a withdrawal at 59½ if you still work at
the employer, and IRAs could be anywhere such as a bank CD that carries a
penalty for pulling out funds prior to the maturity.
Age 62
This is still the age that anyone can
begin to receive Social Security payments.
Congress has not pushed it back as of yet. If you do elect to receive
payments, however, this is an age prior to what's called your FRA or
Full Retirement Age. This means if you elect payments and then work
there will be a test of your total earnings to see if you are able to
keep the income from Social Security. Social Security actually makes
these payments up to you over time when you do reach FRA, but the
planning decision is simply: Can you keep working? If so, this may be a
non-issue. If not, does it make sense to use savings to let Social
Security increase or start it so you are spending the government's money
instead of your own?
Age 65
You can sign
up for Medicare beginning three months before your 65th birthday, and
coverage can start as early as the month you turn 65. This is separate
from your Social Security election decision even though, if you are
receiving payments, your Medicare bill will come out of the benefit. Age
65 is often used as a default retirement age because of this ability to
sign up for health care. Being separate from any employer, the
prerequisite to obtain coverage is simply age and ability to pay.
Consider your overall goals and access to health care when selecting
age, however.
Age 67
In 1983, Congress
created a multi-decade transition for Social Security to help keep it on
a more sustainable path. Whether another such transition is necessary
now is being fiercely debated, but under current rules one's official
retirement age is not one particular age but rather a schedule depending
on your year of birth. The Social Security full retirement age is 67
for everyone born in 1960 or later. And it is anywhere from 65 to 66 and
several months for those born prior. This age, though, like I've said,
isn't the first date you can receive payments. It's really simply the
age you can begin or continue receiving payments and also work as much
or as little as you would like.
Age 70
There
are two important milestones at age 70 from a retirement-planning
standpoint. One is if you haven't already begun receiving Social
Security payments, you will have to do so. If you are working past age
70, then hopefully it is because you have a passion for your profession
and a physical endurance above the average, and not because you
lack other financial options to cover your expenses. The other milestone
happens at 70 and 6 months.
During the calendar year in which you
turn 70 and 6 months and every year thereafter, other than an extra
window the IRS gives you until April 1 after this first such year, you
now have to begin taking distributions from your IRAs and prior employer
401(k)s. This may not be the bad news you might see it as. If you are
retired and taking withdrawals already, then these may not only cover
your required withdrawals but may be more than necessary. If you aren't
taking withdrawals, the amount you have to take is 3.65% of the value of
such retirement assets. This isn't the tax, simply the amount that must
come out and be taxed, leaving the net balance for you to spend, save
or gift as you see fit. Check with a tax adviser and financial adviser
to verify you are always following these "required minimum distribution"
rules, as the penalties are steep.
The Last Day of Your Life
Why
is the last day of your life important if you are still, hopefully,
decades away from it — and perhaps haven't even retired yet? Because it
is relevant to consider your life expectancy when making decisions about
when your retirement will begin and what it will look like. You can
look up online using a variety of calculators what your average
remaining life expectancy is given your current age, sex, approximate
health and lifestyle. But then there is genetics in your family, medical
advances and so on. Does the calculator suggest you have a life
expectancy of 85 but you have a grandparent of the same sex who is 95
and going strong? Alternatively, does it say on average 82 is your last
year but you have several uncles and parents who didn't reach 65? Within
reason, these precedents can and should affect your planning.
So
as you can see why it helps to plan ahead – and in stages so you don't
get overwhelmed. The reassuring thing is that many, many people go
through this process, and do so successfully.
Culled from Credit.com
