In financial planning, we are projecting forward a range of plausible future outcomes and then trying to improve upon them. This involves goal setting, fact gathering, and plenty of Monte Carlo simulations. Here are some of the milestones we look for along the way.
50 – Catch-up provisions. At age 50, the amount of money you can put into qualified accounts increases – a benefit that could be worth an additional $176,000 at age 65, assuming a 7% rate of return.
The IRA contribution limits increase by $1,000 – this is true for Traditional (pre-tax) and Roth IRAs. If you have a 401(k) through work, the increase is larger, growing by $6,000. Should you do pre-tax or Roth? The answer lies in a projection of what the age 70 ½ Required Minimum Distributions may do to your future tax bill. It’s worth crunching the numbers even 20 years in advance. However, not all individuals are qualified to contribute to a Roth IRA.
55 – Unemployed?Between age 55 and 59 ½, if you lose your job or even quit, the IRS will waive the 10% penalty for dollars distributed from your most recent retirement plan 401(k) or 403(b). It may not be the best long-term planning strategy, but its an option.
59 ½ –There are two planning options which begin at this milestone. First, in-service withdrawals can begin at this age, which means you do not have to leave your job to access 401(k) assets. I am not suggesting withdrawing funds to use for current spending simply because there is no longer a 10% penalty for withdrawing funds early. Over the years, many employees missused this feature by withdrawing dollars actually needed to support their future retirements, and some plans even removed this option to curb
behavior. The benefits to in-service withdrawals are access to more investment options and access to cheaper investments. Second, few 401(k) plans offer the option to convert pre-tax savings to Roth savings within the plan. But after age 59 ½, another reason for an in-service withdrawal is to begin thinking ahead to what RMDs will be in the future. There is nothing bad about having a large, pre-tax 401(k), but large amounts of pre-tax dollars lead to large RMDs which lead to higher tax brackets.
62 – The first opportunity to begin taking Social Security, but at a reduced payment. There are a few situations where taking Social Security may be prudent, but in general, if healthy, delaying Social Security to age 70 is a wise move. Before the Full Retirement Age (FRA), payments are decreased by 8% each year permanently. But for each year of delay between FRA and age 70, the payments will grow by 8% per year.
65 – Medicare.There is a seven- month enrollment window – three months before/after your 65th birthday month – to sign up for Medicare. Even if you are working at age 65, signing up for Part A might make sense.
66 to 67 – Full Retirement Age. This is the age at which Social Security payments are no longer reduced. If you are in good health and can afford to do so, it likely makes sense to wait to age 70.
70 – Social Security Max. Typically, there is no reason to delay Social Security past your 70th birthday. Take the money and run.
70 ½ – Required Minimum Distributions (RMDs). After this age, the IRS requires a percentage to be withdrawn from Traditional IRAs and/or pre-tax retirement plan assets, assuming you are no longer working. Withdrawals of this type have not yet been taxed and are treated as ordinary income for tax purposes. A good financial planner will project out these RMDs decades in advance to see what impact they will have on future tax brackets. For those who maxed out Social Security payments, there is very little room between Social Security earnings and the first large step up the tax bracket ladder from the 12% to 22% tax bracket.
John Brannon, CTP, MBA, CFP®
Portfolio Advisor with Beshear Financial/Retirement Planning Milestones
Information is for educational purposes only. Consult with a financial professional for recommendations based on your individual circumstances.
Article prepared by Associate Wealth Management Advisor John Brannon and Wealth Management Advisor Ben Beshear. Joseph Ben Beshear uses Beshear Financial as a marketing name for doing business as representatives of Northwestern Mutual. Beshear Financial is not a registered investment adviser, broker-dealer, insurance agency or federal savings bank. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries. Representative is a District Agent of NM and Northwestern Long Term Care Insurance Company, Milwaukee, WI, (long-term care insurance) a subsidiary of NM, and a Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS) (securities), a subsidiary of NM, broker-dealer, registered investment adviser and member FINRA and SIPC.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
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