If there is one Active Keep rule you must obey early and often it’s this: You cannot miss the layups!
Throughout your working life you will face many opportunities to set yourself up for a nice retirement, and the rules are set forth, with prescribed timelines and deadlines, and while missing these are like missing the proverbial layup, life is full of distractions, so you need a plan.
For as long as I can remember, we’ve been told to have a 5 year plan, right? We’ve been conditioned to put things in our smart phone or day planners (if you’re old school) and schedule ahead, but how far ahead is too far ahead?
There is no “too far ahead” when it comes to retirement planning. Done well, it will take the patience of a statue, even though the years seem to fall off the calendar at an alarmingly rapid clip. It’s simply never too early to start building your nest egg and avoid the mistakes that will jeopardize your future.
Age 0
Yes, that’s a “0,” as in ZERO. Parents can establish a ROTH account for a minor with an earned income. While not within the scope of this post, the creative and legal ways that a minor can earn an income can be found elsewhere on the web, but if you are an inquiring mind, start the research. If you own a family business, you are one step ahead. If not, start one!
Age 21
Ok, by now you should be earning money, unless you just can’t seem to pull yourself away from the Nintendo. But for everyone else, 21 is generally the minimum age most employers permit employee participation in 401(k)s, 403(b) plans and 457 plans.
Assets in tax-advantaged retirement accounts are approaching the $30 Trillion mark, so these plans have scored big with employees. When there is an “employer match” it’s literally like stepping up to the “free money window,” but would it surprise you to know that, according to the U.S. Census Bureau, only a third of all Americans are taking advantage of it? They are rejecting free money! They are missing the lay up.
Think of it this way: even if a retirement plan participant is the unluckiest person on the planet, contributes $2000 a year, and that amount is matched by her employer with another $2000, and she then picks the world’s lousiest investment that loses 50% a year (nearly impossible given all of the 401(k) plan regulations), they would still have $2000. Pigs WILL fly before this scenario ever happens, but you get the point. You cannot miss the layup! Contribute to your 401(k). NOW!
Age 50
Fast forwarding thirty odd years, you’ve been working and saving in 401(k), ROTH accounts, traditional IRA plans, and other forms of long term investments that offer growth and tax benefits.
At age 50, you can now play a little catch up if you’ve fallen behind, or simply supercharge your efforts if you haven’t. Congratulations, you are now eligible for “catch-up” contributions, which means you can put even more into your plans each year since the annual limits are higher for you. For 2018 that means $6,000 more for a 401(k), 403(b), or 457(b); and $1,000 more for a traditional or Roth IRA.
Age 55
If you separate from service in the year you turn 55 (or later) you can begin taking distributions from your employer’s retirement plan without being assessed the 10% early-distribution penalty. From a planner’s point of view, you probably shouldnt unless you are in financial straits. You may still have a tax bill on the withdrawls, as you would at any other age, but there is no early withdrawal penalty. Be aware, this does not apply to your personal retirement accounts (See below, age 59 1/2)
Age 59½
So, starting on that day smack in the middle of you 59th and 60th birthday, you can begin to take distributions from you IRA accounts without incurring an early-distribution penalty, but be aware that your distributions are treated as taxable income in the year you take them and may be subject to income tax.
Also starting at age 59½ you may be allowed to take an “in-service” distribution distribution from your 401(k) or 403(b) if you are still employed and the employer has allowed that provision in the qualified retirement plan they sponsor. This will be spelled out in a document called the SPD, or Summary Plan Description. Ask your benefits rep if this is something you want or need to do.
Age 62
Age 62 is the earliest age at which you can claim Social Security benefits, but exercise caution. MUCH has been written and debated about the appropriate time to begin SSI, and every situation is different, depending on your health, longevity, marital status, other assets, and so forth. It’s a big question for which no pat answers exist. Consult a financial professional like a CFP or CPA to work this out before you pull the trigger. Keep in mind that if you do take early payments your SSI income will be 8% less annually than you would receive at your full retirement age (FRA).
For instance, if your FRA is 66, and you begin taking checks at 62, you will be getting 32% less than you would have gotten had you waited until your FRA to take the income. That is quite a whack, so exercise extreme caution here, and consider if you genuinely need early income, your health and longevity outlook, your spouse’s benefits, and other factors. It’s a decision you don’t want to mess up.
Age 65
Three months before your 65th birthday is generally when you should apply for Medicare. Like Social Security, Medicare is a program that has thousands of rules written by congress and enforced by government bureaucrats. While that alone should scare the bejeezus out of you, stay calm, and learn the rules and how they apply to your situation. Get a handle on it, because knowing the facts will help you maximize your Medicare benefits.
Age 66 and 67
Depending on your birth year, this is the full retirement age (FRA) for claiming Social Security benefits, meaning you get the full benefit, and not the lower benefit amount if you had taken it early. While you may apply early (at least age 62) waiting has benefits, i.e., the longer you wait, the bigger the check, BUT that is not always the best solution. Social Security is not one-size-fits-all.
Age 69½
As a lifelong retirement investor (remember, if you can, you may have started at the tender age of 0!) this year is a real milestone: it’s the last year you may contribute to a traditional IRA, which must end the year you reach 70½. The good news is you can still contribute to a ROTH, if you consider it to be good news that you are still working at 70. If so, hats off to you!
And now is the age you may convert your traditional IRA to a Roth IRA without having to first take a required minimum distribution, or RMD. If you wait until age 70½ or older, you can still convert but you will have take RMDs prior to converting. Also, if you are retired and not working, and you were sharp enough to participate in a Roth 401(k) or 403(b), you can roll those funds to your personal Roth IRA without having to first take an RMD. This would be an excellent strategic move because Roth IRAs, unlike Roth 401(k)s, are never subject to lifetime minimum distributions. Layup!
Age 70
If you are one of the fortunate few who gathered enough personal assets that enabled you to defer taking your SSI checks, times up! You have reached the age where the benefit no longer goes up because of deferring it, and the amount has reached the maximum. Claim it. Enjoy!
Age 70½
Uncle Sam wants his piece. Now you must begin to take annual taxable RMDs from all of your IRAs, except for Roth IRAs. While you are required to take your initial RMD in the year you reach 70½, you may defer the initial RMD until April 1 of the following year. After that, annual RMDs must be taken by December 31 each year.
Okay, we covered seventy years in a few minutes! What a trip. Our goal was to put the timeline in perspective as it relates to financial planning for retirement. To quote ourselves, retirement plans are governed by “thousands of rules written by congress and enforced by government bureaucrats,” so seek help. Don’t do this alone, and never rely on this blogpost, or any other online information for such an important issue.
Age is a number!
There is always time to plan, and adopt a Passive Make, Active Keep mindset!