Age Milestones and How They Affect Your Financial Plan
There are many important milestones ages in a person’s life — from driving your first car at 16 to making your voice heard by voting at age 18.
Beyond that, we get into the exciting stuff…financial planning milestone ages! While these milestones are general rules of thumb and won’t apply to everyone, they’re still a quick and simple way to gauge where you stand and plan for your future.
Retirement is one especially big milestone that may be on the horizon for you in the coming years. After a life of hard work and financial savvy, no doubt you want to enjoy these golden years in comfort!
Today, we’re going to identify the most important age milestones around retirement that you and your loved ones should be on the lookout for.
Common Age Milestones Before and During Retirement
Age 50: Catch-Up Contributions
The year you turn 50, the IRS allows you to make additional contributions to your retirement account. This is called the “Catch-Up” rule. The idea is that you are much closer to retirement at age 50 than you were at age 20 and thus you should be given the flexibility to save additional money for such an important goal.
If you want to improve your retirement score, this is a fantastic place to start!
Workplace plans 401(k), 403(b), & 457(b): The additional amount you can contribute to your account is $7,500 per year in 2024. This means that if you’re in the highest marginal tax bracket of 37%, you could save $2,775 per year in taxes simply by storing that money in your pre-tax retirement account vs your checking account!
If you don’t want to take a tax deduction today and instead prefer tax-free distributions, the additional $7,500 could go into the Roth portion of your retirement account. This is a huge win as it allows for tax-free growth and distribution, once you reach retirement age. Be sure to check to see if your workplace plan allows for Roth contributions.
IRAs: Individual Retirement Accounts are also eligible for catch-up contributions depending on the type of plan that you have. A traditional or Roth IRA allows for an extra $1,000 catch-up and a SIMPLE IRA allows for a $3,500 catch-up contribution, both in 2024.
*Pro Planning Tip: Health Savings Accounts also have a catch-up allowance of $1,000; however, this doesn’t kick in until age 55. If you’d like to learn more about HSAs, check out our blog: Health Savings Accounts – Why everyone should use one! (if you’re eligible)
Age 55: Early Retirement
If you were fortunate enough to do several planning strategies at the beginning of your career such as paying down debt, saving early and often, investing, and living within your means, it’s very well within reach to be able to retire earlier than the average age of 64.
Two of the most common questions our clients ask are “How do I replace my paycheck?” and “If I retire at age 55, am I not allowed to take withdrawals from my retirement account until age 59 ½?”
“The Rule of 55,” says that you can withdraw money from your workplace retirement account without penalty if you leave your job during or after the year you turn 55.
This is a great benefit meaning that if you work diligently enough in your planning to be able to retire early, then you shouldn’t be punished by simply living off the nest egg you’ve saved. Of course, you’ll still have to pay ordinary income tax on the tax-deferred savings withdrawals but income planning in retirement makes for a great conversation to have with your Financial Planner.
Age 59.5: Retirement
If there’s any age in this article that most people are familiar with, it’s the age 59.5. This is because most people associate it with retirement but why?
While contributing money to your various retirement accounts, if you’re doing it on a pre-tax basis, you get the benefit of taking a tax deduction against your income for every dollar saved. Invested funds grow tax-deferred which means you don’t pay tax on capital gains, dividends, and interest that are generated in the account year over year. The idea is that if you’re going to take advantage of all these great tax benefits, then they should be for the sole purpose of saving for the intended purpose of retirement and should not be touched until age 59.5 or later.
What happens if you need to pull the money out early? When you withdraw early from a pre-tax IRA or Workplace Savings Plan, you must pay ordinary income tax as normal, AND if it’s before the age 59.5 you’ll also pay an additional 10% on top of your highest marginal tax rate. This additional tax is called the “Early Withdrawal Penalty.”
Age 62: Social Security Eligible
One of the most common mistakes we see in a person’s financial plans is taking Social Security at the earliest age possible, 62. Note that this is not always a mistake, and there are specific situations when taking Social Security early does make sense! But in general, you might be thinking “I’ve earned it, and I don’t know how much longer I’ll live or how much longer Social Security will be around. I might as well get as much as I can before I die.”
There will always be an exception, however, for most people the numbers work in your favor by waiting until full retirement age or later. Here’s how taking Social Security early affects your income.
You can take Social Security up to 36 months early. For each month that you take your benefit early, it reduces the monthly payment by 5/9 of 1 percent. That comes out to a 6.67% reduction per year. Meaning, if you take the benefit as early as possible, 36 months early, that’s a total reduction in your Social Security monthly benefit of 20%, for the rest of your life!
According to 2022 numbers from the CDC, the average lifespan for someone in the US is 77.5 years. This means that the average person could see a 20% reduction in their payment for over 20 years by simply taking it early.
There are many reasons that support the strategy to wait until full retirement age, or later. Further, if you take social security benefits at the earliest age of 62, it would take you until age 79 to break even with the amount you’d be receiving starting at age 70. This is because social security benefits are mathematically designed to be the same amount of money at life expectancy. Studies have shown that having a plan increases your likelihood of living longer which means delaying your benefit could work out in your favor.
Age 65 – Medicare Eligibility
According to an article published by Investopedia, the average health insurance cost in the US has been gradually rising by an average of 4.5% per year! If you plan to retire early, it’s crucial that you consider the out-of-pocket expenses for paying health insurance premiums. Initial enrollment starts 3 months before you turn 65 and lasts for 3 months after the month in which you turn 65, for a total of 7 months including your birth month. If you miss this window, you may be subject to paying late enrollment penalties.
If you are still employed at age 65 and even if you are covered by a workplace health plan, you should still enroll in Medicare. It’s a relatively easy process, you basically just say, “Hi, I’m here, and I’m covered through work” and then when you actually retire and enroll in Medicare, you won’t be subject to late enrollment penalties.
Age 72 – Required Minimum Distributions
If you recall age 59.5 from above, you know that you’re eligible to take distributions, pay taxes, and spend the money without the additional 10% penalty. Age 72 is the year in which withdrawals from these accounts are no longer just eligible, but mandatory.
Remember how for all those working years you were able to take a tax deduction by making pre-tax contributions into retirement accounts like IRAs, 401(k)s, and pension plans? In exchange for that deduction, as well as allowing the money to grow tax-deferred for years, the government requires that you withdraw a percentage of your account each year as a way of creating taxable income from the account. The required percentage will increase gradually each year and is designed in a way to try to prevent you from completely depleting your account over 30 years.
Your first mandatory withdrawal has a special exception in that is due by December 31st the year after you turn 72, not the year of. If you decide to hold off by taking the distribution until the following year, you will be required to take two distributions by December 31st.
Be sure to make these withdrawals every year as the penalty is 50% of the required distribution, on top of the taxes that were owed on the original amount.
Plan Your Future with Confidence
After a lifetime of working hard to support yourself and your family, the last thing you want is for everything to fall apart in retirement. The earlier you begin retirement planning, the better off you’ll be in the long run! Whether it’s maxing out your Amazon 401(k) match or diversifying your income streams with private investments, the right plan will reduce the risk of your funds running out faster than you expect.
Consilio Wealth Advisors works with tech professionals at companies like Amazon, Meta, Google, and Microsoft to help you make sense of your complex compensation package. From strategically managing your RSUs to reducing your tax liability, we’re here to help you win the tax game and achieve financial freedom.
Explore our free resources for tech professionals — specifically tailored to help you extract every dollar you deserve!
Disclosures:
Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The above targets are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
For additional information, please visit our website at www.ConsilioWealth.com.
