Living Columns & Blogs

Ages and stages: Planning for retirement after 50

In our youth-oriented society, it’s easy to feel like birthdays become less of a celebration after you’ve reached the big 50 — but 50 has become the new 40, right?

While turning half a century old is a justified excuse to celebrate your life, accomplishments and future goals, it also doubles as an opportunity to reassess your current and future financial situation. New rules apply when you reach certain ages, and being aware of these rules will help you take advantage of opportunities to save more and avoid penalties.

Consider the following ages and stages when deciding what financial moves will best suit your situation and lifestyle throughout the upcoming years.

Make larger contributions into retirement accounts and a special early withdrawal provision at 50

Turning 50 means you become eligible for larger contributions:

▪ You can contribute an additional $6,000 a year to your 401(k), 403(b) or 457 plan.

▪ If you have a Simple IRA, you can contribute an additional $3,000 a year.

▪ If you have an IRA or Roth IRA, you can contribute an additional $1,000 a year.

It is a great idea to use these provisions to “catch up” if you are behind on your retirement savings, especially because larger contributions are more tax-efficient.

If you are a public safety employee and leave your employment at or after 50, you are eligible to withdraw from your employer-provided retirement account without the 10 percent penalty. You’ll still have to pay taxes, but you won’t have to pay the penalty that most people have to wait until 59  1/2 to avoid. This rule doesn’t apply to IRA accounts, so consider carefully the merits of rolling over retirement accounts from an employer to an IRA.

Make penalty-free withdrawals and larger HSA contributions at 55

You’ll have even more leeway with certain accounts once you turn 55, but be informed of potential consequences. Here are two significant decisions you will have to make:

▪ If you leave your employer in the year in which you turn 55 or after, you become eligible for penalty-free withdrawals from your 401(k). This rule only applies to a current employer. If you changed jobs in your 40s and you separate from your current employer at 55 or older, you can only make penalty-free withdrawals from the 401(k) account at your current employer.

▪ If you have a Health Savings Account, you can contribute another $1,000 per year. This additional contribution is worth making since a 65-year-old couple retiring in 2016 should spend approximately $377,000 out of pocket just for health expenses during their lifetime. Maximizing contributions into an HSA will help cover medical costs later in life with favorable tax treatment.

Start withdrawing from your retirement accounts at 59 1/2

Turning 59 1/2 means you can start taking distributions from your retirement accounts without paying the 10 percent penalty tax. However, try to hold off on making deductions if you are still employed. Make contributions to your retirement account as long as possible, especially because people are living longer than ever before.

A little-known IRS rule allows for withdrawals from retirement accounts like IRAs and 401(k) before 59 1/2 without penalty. If distributions are received in substantially equal periodic payments, the 10 percent penalty will not apply. The IRS allows several ways to calculate the payments to determine payment amounts. And they don’t have to be made for the rest of your life. You can choose to stop or change the amount after you reach 59 1/2 and you won’t have to pay any penalties.  

Start receiving Social Security

At 60: You can get widow or widower’s Social Security benefits once you turn 60. Keep in mind that the benefit amount would be vastly reduced from the full benefit available at 66 or 67, depending on your birthday.

At 62: You can choose to start receiving your Social Security benefits at age 62. However, your benefits will be reduced by 25 or 30 percent, depending on your year of birth. Getting your Social Security benefits at 62 might make sense if you need to cover health expenses or did not save enough for retirement, but you’ll get a larger amount if you can delay a few years longer.

Sixty-two is also the age where you can collect a spousal benefit — keeping in mind that when you claim a spousal benefit at 62, you will be receiving a reduced amount and will not be able to delay your benefit to get a larger amount later. You’ll have to wait to 66 for that benefit.

Although you can work and collect Social Security benefits, if you earn more than a certain amount ($16,920 in 2017), Social Security will withhold one dollar for every two dollars you earn over the annual limit.

Sign up for Medicare before turning 65

You can sign up for Medicare up to three months before turning 65. Hospital insurance (Part A) is free, but medical insurance (Part B) requires you to pay a premium based on your income. Medicare usually starts on the first day of the month when you turn 65. If you or your spouse is still employed and the employer offers health insurance benefits, you can choose to delay Medicare part B. It is a good idea to compare the employer coverage with Medicare. You might have better coverage through Medicare and a Supplement than what an employer can provide. Also, keep in mind that you can no longer contribute to an HSA once you enroll in Medicare. However, you can still use your HSA to cover health-related expenses.

Reaching full-retirement age

At 66: Turning 66 means you reach full-retirement age if you were born between 1943 and 1954 and are eligible to receive 100 percent of your Social Security benefits. This is also the age when you can claim spousal benefits and delay your benefits to age 70 — gaining an additional eight percent every year on your own benefits.

Full retirement age will incrementally increase to 67 for those born after 1954.

Or at 67: If you were born in 1960 or later, you will reach full-retirement age at 67. You can apply for your Social Security benefits even if you are still working.

Apply for Social Security benefits at 70

If you haven’t started receiving your Social Security benefits, it is time to apply for them. You should get 76 percent more than you would have at age 62.

Start taking your RMDs out at 70 1/2. Now, you are legally required to start taking money out of your IRA, SEP IRA, 401(k), 403(b) and 457(b) plans. If you fail to withdraw the Required Minimum Distribution, you will have to pay a 50 percent excise tax on the amount you didn’t withdraw.

Your RMD varies depending on your age and life expectancy, but you can withdraw more than your RMD without any penalties. You can also take your RMD from a single account or combine withdrawals from different accounts.

If you don’t need to withdraw money to live comfortably, you can make a tax-free Qualified Charitable Distribution.

Alongside the choices that come with these age milestones, there are other important decisions you will have to make throughout the years. Consider when to renew or convert your term life insurance policy, when to purchase a long-term care policy, and of course, when to stop working.

Life after 50 will present new challenges, but more importantly, new opportunities. Don’t let your financial situation feel like a challenge. Use these ages and stages to assess the best course of action, prepare yourself to make monetary decisions, and think about getting guidance from a financial adviser.

Ash Toumayants is the founder of Strong Tower Associates, a retirement planning firm dedicated to helping clients in all stages of life prepare for retirement. For more than a decade, he has helped hard-working people across central Pennsylvania prepare for retirement.