Turning 70 is a major milestone, and whether you're retired or not, your upcoming birthday could have a significant impact on your finances. Here are three things you need to know if you're turning 70 in 2017.
1. If you're still working, you're in good company
While many Americans aim to retire well before 70, that doesn't always happen. According to a recent study by human resources consulting firm Willis Towers Watson, almost 25% of Americans say they won't be able to retire until age 70 or older.
But if you are still plugging away at the office by the time 70 rolls around, you should know that there are benefits to extending your stay in the workforce. First, the longer you work, the more opportunity you'll have to save money for retirement. If your company sponsors a 401(k), you can contribute up to $24,000 next year (those under 50 are only allowed a maximum of $18,000). Furthermore, if your employer offers a match, you'll get your hands on even more money -- free money -- just by participating.
Along these lines, working into your 70s also means you'll have a shorter retirement to fund, which can take much of the financial pressure off. A Transamerica study reveals that over 40% of workers 50 and older are more afraid of running out of money in retirement than dying. Every year you spend in the workforce is therefore another year of retirement you don't have to save for.
Finally, studies have shown that working longer could actually be better for your health. A study out of Oregon State University shows that working past age 65 could prolong your life, while retiring early could actually be a risk factor for dying earlier. Working at age 70 is a great way to exercise your mind, your brain, and your social skills, so whether you've yet to leave the workforce for financial reasons or because you love your job, know that you're making a really smart move.
2. You might as well claim Social Security
Though you're technically allowed to collect Social Security as early as age 62, many people wait until they reach their full retirement age to start taking benefits to avoid a reduction for claiming early. For most Americans who are currently near retirement, the full retirement age is 66, and that's the age at which you're eligible to receive your benefit amount in full. But if you hold off on collecting Social Security past your full retirement age, you'll get an 8% increase in benefits for every year you delay. It therefore makes sense to wait on those benefits if you don't need the money right away or have another source of income to tap.
However, once you reach age 70, the incentive to delay Social Security runs out. So if you're turning 70 next year and haven't started taking benefits, you should plan on doing so in time for your birthday. Otherwise, you're basically just passing up money you're entitled to.
3. You may need to plan for IRA withdrawals
The money you've been saving in your retirement account generally can't just sit there forever. Unless you have a Roth IRA, you'll need to start thinking about required minimum distributions if you're turning 70 next year.
Traditional IRA and 401(k) plans mandate that participants start taking minimum distributions by April 1 of the year following the year they turn 70 1/2. It may sound confusing, but it works like this: If you have a traditional retirement account and turn 70 in Oct. 2017, you won't have to worry about a minimum distribution the following April. But if your birthday is earlier in the year -- say, February -- and you therefore turn 70 1/2 in Aug. 2017, you'll need to take your first distribution by April 2018.
Now if you're still working at that point, you're allowed to leave your 401(k) intact. But if you have an IRA, you'll need to take that minimum distribution whether you're working or not. The amount you'll need to withdraw will be based on how much money you have in your retirement account at the end of the previous year as well as your life expectancy. No matter what that number is, be sure to take your distribution in time and in full. Otherwise, you'll face a 50% penalty for failing to withdraw your own money. In other words, if your required minimum distribution is $8,000 and you don't take it when you're supposed to, you'll kiss $4,000 of it goodbye.
No matter where you are in life, turning 70 is something to celebrate. Whether you're planning to retire in 2017, keep working, or do a little of both, if you plan accordingly, you'll be in a good financial position as you navigate this next stage.