Although we think of retirement as a specific point in time, it is really a process. This process has key retirement dates that begin just before age 60 and end just after you turn 70. Understanding what those milestones are is vital in determining when you can collect retirement benefits and what sort of retirement you can afford. Here is a list of milestones in chronological order:
That’s right, you get to celebrate a half birthday again. Once you reach the age of 59.5, the IRS will no longer levy a 10% penalty for withdrawing funds from your IRA or 401k. If you’re taking funds from a traditional IRA or 401k (as opposed to a Roth), the withdrawal will still be taxed as income, but the IRS will no longer tack on a penalty.
If you qualified for Social Security, you can begin drawing Social Security at age 62. 62 is well before what the Social Security Administration considers full retirement age (or FRA), and the benefit you receive at 62 is a good bit less than what you receive if you to begin drawing at your full retirement age, which ranges from 65 to 67. You can find your full retirement age as well as estimates on the impact of drawing benefits early here.
An additional benefit for residents of the State of Georgia 62 or older is the state tax exemption on income from retirement savings. This first $35,000 in retirement income is exempted from state tax once you turn 62. The amount increases to $65,000 per individual by age 65. Finally, many counties and municipalities begin offering age and income related homestead exemptions once you reach 62.
Medicare eligibility begins at age 65. Reliable, cost-effective healthcare in retirement is crucial. In most instances, if you’re still working and have healthcare from your employer, you don’t have to switch to Medicare (more on that here). Even in that instance, it’s worth comparing the insurance you have to Medicare to confirm which is more cost effective and provides the coverage you need.
At 65, your standard deduction also increases, so if you don’t itemize, you’ll get a bit of a tax break.
Age 65 to 67
The Social Security Administration considers full retirement age (or FRA) to be anywhere from 65 – 67. At this point, you’ll receive your full Social Security benefit. Keep in mind, the benefit can increase beyond this amount if you delay further as detailed below.
Once you reach full retirement age, you can elect to wait to collect Social Security. If you do so, the Social Security Administration will apply delayed retirement credits to the benefit you will draw when you begin to receive Social Security. That can increase your payout by up to 8% per year as detailed here. If you can afford to wait to draw, it can make sense to do so. However, there are no delayed retirement credits for waiting beyond age 70, so it typically makes sense to begin drawing Social Security no later than 70.
Another half birthday! If you have an IRA, Simple IRA, SEP IRA or retirement plan account, the IRS typically requires that you begin withdrawing from those accounts when you reach the age of 70.5. The amount that you must withdraw is based on your age along with the balance of the accounts as of the end of the prior year.
Be aware that failure to take your RMD can lead to a penalty of 50% of the amount you should have taken. Your retirement plan should include these RMDs to account for the taxes associated with the withdrawal (because withdrawals are taxable). Depending upon your specific situation, retirement income planning can help you efficiently manage RMDs in retirement.
It’s good to keep the above milestones in mind as you plan. In addition, your plan may have key retirement dates. Those who have pensions – like Federal Government employees – should understand how pensions are calculated. There are also esoteric rules around Social Security and spouses receiving benefits.
If you start with the milestones above and then dig into the particulars of your situation, you’ll have taken an essential step in understanding when you can retire.