Manage Your Retirement Income with the Critical Ages in Mind

Certain ages are critical when managing our retirement plans. Failure to plan with those ages in mind can produce lost benefits. In this article I outline those dates and explain how they affect your retirement benefits.

You've saved for years to accumulate benefits to use throughout your retirement years. Most likely you've used government-regulated plans - called qualified retirement plans, company plans, IRAs, etc. - to do so.

But these tax-advantaged retirement savings plans have rules you must follow - both for companies and individuals. These rules prescribe key ages to frustrate early use of those savings and then to force their use later in retirement. You also paid into the Social Security and Medicare programs; they also have their key ages.

Being aware of these ages and what they imply is critical to your retirement planning. Let's explore them from the earliest to the latest:

Let me first mention that most tax-advantaged savings plans involve tax deductible contributions you make from your working income. These savings then grow tax deferred. When this money is eventually withdrawn, it'll be taxed as ordinary income. Such plans also include company pension plans - all of which are produce taxable income at retirement.

There are also 'Roth' based plans (Roth IRA, Roth 401(k), etc.) that you contribute to only with after-tax working income. These savings grow tax-free - a clear tax-advantage. And when you withdraw from them, the money comes out tax free.

The government offers the opportunity for using such tax-advantaged savings/retirement plans as an incentive for people to save for their retirement - and to lessen their dependence on Social Security benefits. So government sets up rules to penalize early withdrawals from these plans, and more... Let's check out the rules - by age:

Age 50 - Catch-up age for additional contributions to retirement plans:

The earlier you can begin contributing to your retirement, the better. All tax-advantage retirement plans have limits on how much you can contribute yearly. But when you reach 50 years old, as an added incentive you can contribute a little more - called 'catch-up' contributions. Keep current each year for increases in both the regular annual contributions and catch-up amounts.

Age 59½ and age 55 - Age for no more 10% penalty for early withdrawal:

To frustrate early withdrawal of retirement savings, our government imposes a 10% penalty tax on what you withdraw before you turn 59½. But the government has lowered that age to 55 only for those laid off from work so they can access their company plan benefits.

Of course, anything you take out of these plans is treated as taxable income (except for Roth plans) so the 10% penalty is imposed in addition to whatever income tax you'd pay.

Age 65 - Age you qualify for Medicare:

You must wait until age 65 to qualify for Medicare. This is a government-assisted health care system to help the elderly. You must apply for it to receive it. Apply 3 months before turning 65 so you have access to it on your 65th birthday.

Age 65 or your FRA and (ages 62 to 70): Social Security Retirement Ages Sixty-five has long been the official retirement age for business, Social Security, and Medicare benefits. And it still is for Medicare eligibility.

But future insolvency problems with Social Security has made it mandatory to slowly increase the retirement age to receive your full Social Security benefits (i.e. income).

The age at which you get your full Social Security benefits is called your full retirement age (FRA). It's been slowly increased to 67 depending on the year in which you were born.

Everyone can receive Social Security benefits earlier than their FRA, but their (i.e. the income) is reduced from what you'd get if you waited until your reached your FRA. This reduction increases for each month you begin benefits before your FRA. Generally, age 62 is the earliest you can begin receiving your permanently 'reduced Social Security income'

On the other hand, government rewards you by increasing your Social Security income beyond your FRA benefits for each month you delay receiving them beyond your FRA. However, no additional benefit is given for waiting beyond age 70.

Age 70½ - After turning this you have minimum required distributions (MRDs) annually:

Lastly, the government wants the tax money for all that 'untaxed' retirement plan money you've saved. So when you turn 70½, they require you to withdrawal at least a minimum required distribution (MRD) from your plans annually.

Remember that all the withdrawals are taxed as ordinary income. If you withdraw less than your MRD, you'll be penalized heavily on the fraction of the MRD you didn't withdraw. So do it; it's not worth it not to.

Incidentally, Roth plans have no MRD obligations for you. And whatever you take out is tax free too.