Radio speaker Earl Nightingale said, "All you need is the plan, the road map, and the courage to press on to your destination." Nightingale wasn't talking about retirement planning, but he may as well have been. Despite the trouble Americans have saving for retirement, the actual milestones to get there are fairly straightforward.
The shortfall of retirement savings in the U.S. is well documented. In 2019, a retirement model developed by EBRI projected that 40.6% of U.S. households with a head of household aged between 35 and 64 will run out of money in retirement. The same model determined that the aggregate retirement shortfall is about $3.83 trillion.
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You can avoid becoming part of these statistics by knowing the retirement roadmap and staying on course for the long haul. Here are seven milestones you'll want on the calendar as you grow your nest egg.
1. In your 20s: Your first day of working full-time
If you follow the traditional career path, you start your working life with low-paying, part-time gigs. At some point, you grow into a full-time role that offers a benefits package and, possibly, a 401(k). Guess what? You just reached your first retirement planning milestone. The day you start working full-time is the day you should start making retirement contributions. If you have a 401(k) and are eligible for a Health Savings Account (HSA), contribute to both. Otherwise, start maxing out your annual IRA contributions. The maximum limit in 2020 is $6,000, or $7,000 if you're 50 or older.
Now, does everyone follow that advice? Nope. I sure didn't. And a study from Nationwide says I'm not alone. Most Americans don't start funding their retirement accounts until their 30s.
You can't exactly make up for that lost time, but you can kick off a new savings habit today. If you have a high-deductible health plan, you're eligible for HSA contributions of up to $3,550 as an individual and $7,100 for a family. You should also put 10% of your salary in your 401(k) if you can swing it.
It pays to save now, when time is on your side. Say you put $500 per month into a tax-advantaged retirement account. If your money is invested to return 7% on average, you'll have about $87,000 after 10 years. Then, if you could stop contributing entirely and wait another 10 years, you'll see that balance grow to almost $175,000 -- without another cent of contribution from you.
2. Age 59 and a half: Penalty-free withdrawals from 401(k)s and traditional IRAs
Between your first day of full-time work and age 59 and a half, you should be quietly funding your 401(k), HSA, and traditional IRA. At age 59 and a half, your disciplined savings finally pays off. You can now retire and withdraw from your 401(k) and traditional IRA without tax penalties. Know that these withdrawals are taxed at your normal income tax rate. It's a fair trade-off, though, because most of your contributions to these accounts were tax-free.
If you are still working for the company that sponsors your 401(k), you may not be allowed to take withdrawals. You could, however, withdraw 401(k) assets that have been rolled into a traditional IRA.
3. Age 62: When you can claim Social Security
You can claim Social Security benefits at age 62. Your benefit at this age will be up to 30% lower than it would be if you claim at your Full Retirement Age (FRA). You'll also be subject to income limitations that can reduce your benefit. For that reason, plan on working part-time or not at all if you're going to claim before your FRA.
4. Age 65: HSA withdrawals for non-medical expenses and Medicare eligibility
At age 65, you can take withdrawals from your HSA for non-medical expenses without penalty. That means your HSA essentially turns into another stream of retirement income. Funds taken from your HSA for non-medical expenses are taxed at your normal income tax rate, just like a 401(k) or traditional IRA withdrawal. You can still take withdrawals for medical expenses tax-free.
You also qualify for free Medicare hospital insurance (Part A) and paid Medicare medical insurance at age 65. Sign up for Medicare Part A three months before your 65th birthday, whether or not you want to start receiving Social Security.
5. Age 66-67: Full Retirement Age (FRA)
Your FRA depends on the year you were born, but it's between ages 66 and 67. When you reach FRA, you become eligible for your full Social Security benefit. You are also no longer subject to income limitations.
6. Age 70: Delayed retirement credits stop accumulating
If you delay claiming Social Security past your FRA, your benefit increases by up to 8% annually. Those increases are called delayed retirement credits, but they stop accumulating when you hit your 70th birthday. Plan on claiming your Social Security benefit at 70 if you haven't already.
7. Age 72: RMDs start
RMDs, or required minimum distributions, are minimum withdrawals you have to take from traditional IRAs, SEP-IRAs, SIMPLE-IRAs, and 401(k)s. The penalty for not taking the full required distribution is severe: 50% on any amount not withdrawn. In 2020, RMDs are required if you hit age 72 at some point during the year. In prior years, RMDs started at age 70 and a half.
You can delay RMDs past age 72 if you are still working and you're not a 5% owner in the company that sponsors your 401(k). In that scenario, you can delay RMDs from your 401(k) until the year you retire.
The golden years
Most of the major retirement planning milestones happen after age 59, but the real work of retirement planning is done in your 20s, 30s, and 40s. You have the roadmap, and now it's up to you to press forward. Save boldly today to secure your dream retirement tomorrow.
