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YOU CAN THINK of retirement as having four phases. Want to make sure you make the right decisions at the right time? An age roadmap can help.
Phase No. 1 is the preretirement period beginning at age 55. Why start then? If you leave your employer after this age, you can access your 401(k) without the usual 10% tax penalty on retirement account withdrawals before age 59½. To have this option, keep your 401(k) at your old employer, rather than rolling it into an IRA.
Also aim to open a Roth IRA by age 55. To access the earnings from a Roth without owing taxes, the account must be open for five years and you must be age 59½ or older. You can, however, withdraw your original contributions to a Roth IRA at any time, with no taxes or penalties owed. Bear in mind that, if you have a Roth 401(k) that you plan to roll into a Roth IRA, the five-year clock doesn’t start until you have the Roth IRA established.
Don’t have long-term-care insurance? This might be the time to buy. The average age to purchase LTC insurance is 59.
Phase No. 2 is age 60 to just before 65, and it revolves around Social Security and Medicare planning. At age 60, Social Security survivor benefits are available. At 62, Social Security worker benefits are available, but they’ll only be 75% of your full retirement age amount—assuming your full retirement age for Social Security benefits is 66.
Three months before turning age 65, you should file for Medicare if you aren’t covered by an employer’s plan. Don’t wait until you turn 65, because it takes time to process the paperwork. By filing three months before turning 65, you should be covered on the first day of your birth month.
Traditional Medicare consists of two main sources of coverage, Part A and Part B. In addition, you can supplement this coverage with Medigap insurance and a Part D drug benefit. Alternatively, you can opt for Medicare Advantage, sometimes known as Part C. Medicare has many moving parts, so research your options well ahead of age 65.
Phase No. 3 is ages 65 to 70. If you fail to sign up for Medicare Part B and Part D at 65, you face permanently higher premiums—unless you’re still covered by an employer’s insurance. If your income is $85,000 or higher as a single taxpayer or $170,000-plus as a couple, you’ll pay a surcharge for Medicare Part B and Part D that’s known as IRMAA, or income-related monthly adjusted amount.
If you were born in the 1950s or 1960s, your Social Security full retirement age falls somewhere between ages 66 and 67. Full retirement age unlocks some key benefits. You can work and collect Social Security without seeing your benefit reduced because of the so-called earnings test. You can suspend Social Security benefits and collect delayed retirement credits until age 70, which will boost your monthly benefit thereafter. You can file a restricted application for spousal benefits only—but you need to have been born before 1954.
If you file for spousal or survivor benefits at your full retirement age, you will receive the maximum amount possible. Spousal and survivor benefits don’t increase if you claim any later than that. By contrast, Social Security monthly worker benefits hit their max if you wait until age 70. Benefit amounts increase by eight percentage points each year you delay beyond your full retirement age.
Phase No. 4 is from age 70½ to 80. Required minimum distributions (RMDs) must be taken from your IRA. They also need to be taken from your 401(k), unless you’re still working for that employer and own no more than 5% of the company.
Currently, your first required minimum distribution must be taken by April 1 of the year after you turn 70½. (In late 2019, Congress raised this to age 72 for 2020 and subsequent years.) Subsequent annual RMDs must be taken by Dec. 31. If you don’t take your RMD, you’ll pay a penalty equal to 50% of the RMD amount. If you do a Roth conversion after this age, you can’t roll over the RMD amount—that money can’t remain in any sort of IRA account—but you can convert a sum over and above the RMD amount. There are no required distributions for a Roth IRA, though you do need to pull money from a Roth 401(k). That’s a key reason to roll Roth 401(k) money into a Roth IRA.
You can make a charitable donation directly from a retirement account to a charity and use it to satisfy your RMD. You don’t get a tax deduction for the donation, but the sum also isn’t included in your taxable income. This is known as a QCD, or qualified charitable distribution.
If you wait until age 75 to 80 to purchase an immediate annuity or have a deferred annuity begin paying, you’ll receive more income due to so-called mortality credits. Unlike, say, life or long-term-care insurance, income annuities effectively become cheaper as you get older.
James McGlynn CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. His previous articles were Package Deals and Last Call.
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Great information – thank you! It just reminds me how (unnecessarily) complicated it is to plan for taxes, social security and medicare in the pre- and post-retirement years. Sigh.
Agreed. Was easier when 65 was retirement age for all and we had pensions. I expect it gets worse too.
Good article. In Phase 1, as an alternative to rolling 401k money to a Roth IRA, consider an in-plan conversion to Roth 401k if the plan allows it. However, note that the converted funds are only available five years after the conversion, not five years after the Roth is established.
I had also understood it was from date the Roth was established, so a couple of years ago I contributed to Roth 410k for a month to “establish” the account. Nothing wrong with that, but I know now that it was ineffective for my purpose. If I do an in plan conversion of $100k this year, that money is available in five years, and if I convert another $100k next year, that money is available five years from next year. As noted, contributions are always available.
I would have thought this to be true for IRA conversion as well, but perhaps not. I know it’s true for the 401k as I just had the conversation.
In Phase 4, good to know RMDs are required from a Roth 401k, and that this could be a reason to move to a Roth IRA. I hadn’t focused on this. Phase 4 is a long way off 🙂
I didn’t know that RMDs are required from a Roth 401k, unless your roll it over into an IRA.
I learned something new.
Same here. Or if I had known, I had forgotten. I still think the conversion to Roth 401k is worth it because of the tax-free withdrawals though.
Yes the phases are a long way off but have to do some things now. I just finished Phase 1. I try to emphasize establish Rothing IRA’s now and looking at hybrid LTC now-if ever going to do so.
Yes completely agree. We’re also presently “Rothing,” both IRA and 401k. (Don’t know if that was a typo or a verb of your creation, but it’s a good one!)
I assume a Roth 401k, whether by contribution or conversion, can be rolled into a Roth IRA at any time to take advantage of the Phase 4 point above. Is that right? Our 401k is a pretty good one, so otherwise might be inclined to just let it stay there.
Thanks
This is the first I’ve heard that congress will probably raise the RMD age to 72 and possibly even 75. It got me googling:
ON May 23, 2019, the House passed the SECURE Act (H.R. 1499) effectively in its original form from Ways and Means. The vote was overwhelming 417-3.
https://www.forbes.com/sites/leonlabrecque/2019/04/09/bigger-iras-proposed-new-tax-law-may-let-you-build-a-bigger-ira-in-retirement/#7ecce40ad3eb
Here’s the article HumbleDollar ran about the bill:
https://humbledollar.com/2019/06/new-rules/
Is it alright if I post a link to this article on facebook? My friends and I are in our early 60s and this article does an excellent job of capturing the main points that are so easily overlooked. I thought that I kept up on financial matters but I learned several things and it amazes me that I didn’t know them.
Please post the link. Click the Facebook button at the upper right of the page. Thanks