Baby boomers are turning 65 at the rate of 10,000 people per day and that means that baby boomers will soon be tapping their retirement nest-eggs. If you're a boomer who hasn't reached retirement yet, consider these retirement savvy insights from our Motley Fool experts.
Dan Caplinger: The baby boom generation is approaching retirement age and for them crunch time is right now. Boomers in their 50s and early 60s are likely at their peak earning years, and many of them have already seen their household expenses fall as children grow up and move out. As a result, there's no better time to maximize savings by setting aside more of those bigger paychecks into retirement accounts and cutting back on now-unnecessary expenses.
Even the government recognizes the importance of the last 10 to 15 years of your career to your retirement finances. Those who are 50 or older qualify for higher contribution limits to IRAs and 401(k) plans, with so-called catch-up contributions letting you put aside an extra $1,000 in an IRA or as much as $6,000 in a 401(k) or similar account.
By saving as much as you can now, you can also get a better sense of whether you'll be able to save enough to reach your goals and retire at the time you want. If you discover that you need more time, then the sooner you know, the easier it is to adjust your retirement timing and make new plans that will make a sustainable retirement a reality.
Cheryl Swanson: As a baby boomer, one of the smartest retirement moves you could make may be to invest in a Roth IRA. While Roths aren't for everyone, depending on your tax rate when you retire, the potential tax savings are huge.
The downside of a Roth is that you'll forgo the enticing perk of a tax deduction the year you contribute, something traditional IRAs offer. But consider the advantages:
- With a Roth IRA, withdrawals at retirement age are tax free.
- Roth IRA withdrawals won't raise your adjusted gross income, so if the total income you need one year threatens to boost your tax bracket, you can dip into your Roth for funds instead of your regular IRAs.
- You can keep contributing to a Roth until the end of your days, and never have to take a distribution.
Roth IRAs have been around since 1998, so it's very possible you already have one. If you're just getting started, you should know that when you turn 50, you can start contributing an extra $1,000 each year. If your income is too high to contribute to a Roth directly -- meaning couples with adjusted gross incomes of $191,000 and up, and individuals at $129,000 or more -- you should know there's a backdoor Congress opened in 2011 to taxpayers of all income brackets.
You can fund a traditional IRA, and then convert it to a Roth IRA. There's a gotcha, however, and it can be a big one. When you transfer funds, you have to take into consideration all your funds in various IRAs to calculate your tax bite. Obviously, this works much better if you don't already have a big chunk in traditional IRAs.
Whatever you do, don't let fear of selecting the wrong IRA wrapper keep you from making any decision at all.
Dan Dzombak: One thing baby boomers need to know about retirement planning is how it makes sense to wait to claim Social Security.
You are entitled to a set level of Social Security benefits depending your work history; this is called your "primary insurance amount." You only get this amount of monthly benefits though if you claim at your full retirement age, which for boomers will be somewhere between 66 and 67 depending on the year you were born.
For those that claim early, your benefits are reduced by as much as 25% compared to your primary insurance amount if you claim at age 62. For those that wait to claim, for every year you wait past your full retirement age your benefits increase by 8% a year. For those with a full retirement age of 66, you can max out your payments at 132% of your primary insurance amount by waiting until age 70 to claim. For example, if your primary insurance amount were $1,000 at age 66, your benefits would vary as follows depending on when you decide to claim.
By claiming early retirees get smaller but more benefits checks. This means retirees will get more money early in retirement than if they waited, but far less money as they grow older. For example, assuming a primary insurance amount of $1,000 we can see how much a person will earn over time.
You can get the basic idea from the chart but here's what it shows on closer analysis. If you expect to live past age 78, then it makes financial sense to wait till at least your full retirement age to claim Social Security benefits. If you expect to live past age 81, then it makes financial sense to wait until age 70 to claim if you can do so (again, this is strictly to maximize your income from Social Security, and things will depend on your specific financial circumstances).
Most people decide to do the opposite of waiting to claim. About 45% choose to claim at age 62 and only 7% claim at any age past their full retirement age. With time until you hit your early 60s, plan now to set yourself up to take Social Security near your full retirement age or later. Your 80-year-old self will thank you.