Most people think that when they retire is a personal decision -- and it is. But when it comes to accessing your retirement benefits, your choice is limited by the rules the government has. Benefits like Social Security and Medicare are available only at a certain age, and there are even restrictions on when you can access your own retirement funds. Below, I discuss six age milestones that everyone should be aware of when planning for retirement.
1. Age 59 1/2: Retirement distributions aren't penalized
When you turn 59 1/2, you may begin withdrawing funds from your retirement accounts without a penalty. Before this, you'll pay a 10% early withdrawal penalty on top of any income tax you owe. It's worth noting that if you're taking money from tax-deferred accounts, you still have to pay income tax, no matter how old you are.
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But just because you can withdraw your money penalty-free at this point doesn't mean you should. The longer the money remains in your account, the more it can grow. The $50,000 you withdraw to cover your retirement expenses this year will be worth over $73,000 in five years, assuming an 8% annual rate of return. Think carefully about how much you need to save for retirement and delay withdrawals until you're reasonably confident you have enough to see you through the rest of your life.
2. Age 62: Social Security eligibility begins
You can sign up for Social Security benefits as soon as you turn 62, but you won't receive your full scheduled benefit if you start this early. For every month that you take Social Security before your full retirement age (more on that below), your checks will be reduced. If your full retirement age (FRA) is 66 and you start taking benefits at 62, you will only receive 75% of your scheduled benefit amount per check. This means that if you were entitled to $1,000 per month at FRA, you would get only $750 per check. Adults with an FRA of 67 are only entitled to 70% of their scheduled benefit if they start at 62.
3. Age 65: You're eligible for Medicare
When you turn 65, you can sign up for Medicare. This helps to pay for healthcare expenses, but it doesn't cover everything. You will still have a deductible and copay for most medical services and prescription drugs. And some services, like dental work and long-term care, are not covered at all.
If you haven't done so already, you should build the cost of healthcare into your retirement savings plan. A recent study by Fidelity shows that the average 65-year-old couple today would need $280,000 to cover their healthcare costs in retirement. If you aren't yet 65, you can expect this number to rise with inflation. Make sure you have enough in your retirement accounts to cover at least this much or consider saving for medical expenses in a health savings account (HSA), if you have one.
Those who are lucky enough to retire before 65 should note that they will be responsible for their own healthcare coverage until they reach 65. You may have to purchase health insurance on your own to ensure that you're covered during this interim time.
4. Age 66 to 67: Full retirement age
The Social Security Administration considers FRA to be 66 to 67, depending on the year you were born. For adults born between 1943 and 1954, it's 66. For those born after 1954, it increases by two months every year. So for 1955, it is 66 and 2 months; for 1956, it is 66 and 4 months -- and so on, until it reaches an FRA of 67 for all adults born in or after 1960.
Your FRA is when you become eligible for 100% of your Social Security benefit. So to use our previous example, if you were entitled to $1,000 per month, you'd get all of it by waiting this long.
5. Age 70: You get your maximum Social Security benefit
If you choose to delay your Social Security benefits, your checks will continue to increase until you reach the maximum benefit amount at 70. This will be 124% of your scheduled benefit if your FRA is 67, or 132% if it's 66. It amounts to $1,240 or $1,320 per month, respectively, if your scheduled benefit was supposed to be $1,000 per month. Begin Social Security somewhere between FRA and 70, and your amount is somewhere between the two.
6. Age 70 1/2: Required minimum distributions begin
At this age, you must begin taking required minimum distributions (RMDs) from all of your retirement accounts except Roth IRAs. This is the government's way of ensuring that it gets the taxes you owe on your retirement savings before you die. Your RMDs are determined by your age and the value of your retirement account at the time. You can use this worksheet to figure them out. Look up the distribution period next to your age and divide this by the total value of your retirement accounts to figure out how much you need to withdraw that year.
It's possible that your RMDs could push you into the next tax bracket, but avoiding them is not an option. If you do, you will incur a 50% penalty on the amount you should have taken out. One way around this is to draw upon your tax-deferred retirement accounts first so the balance is lower by the time you reach 70 1/2. However, this will raise your taxes during the early years of your retirement. Alternatively, you could roll the funds over to a Roth IRA to avoid RMDs, but then you will have to pay taxes on the money in the year that you do the rollover.
Understanding these retirement milestones is important when deciding when to retire, how to use your retirement funds, and when to sign up for benefits like Social Security. You can use this list to look over your retirement plan and decide if you need to make any changes.
