- 6-Minute Article
- May 03, 2019
Your Major Money Milestones in Retirement and How to Take Action
Birthdays and life events are opportunities to make sure your financial plans are on track.
When a birthday or big life event rolls around, you may make a cake or a dinner reservation to mark the occasion. If you’re 50 or older, you might also want to call your your financial, tax, and legal professionals. That’s because some moments can trigger opportunities for making decisions or revisiting plans to help you reach your personal and retirement goals.
Willa Buchanan of Lenexa, Kansas, wanted to retire while she was still healthy and had the energy to enjoy new hobbies. A director at an employee benefits firm, Buchanan had been with her company for 25 years and regularly contributed to her 401(k). Still, she was unsure how she and her husband, an electrical engineer, would live without her salary.
To prepare, the Buchanans sold their house and moved to a smaller home. They also eliminated all credit card debt. Then they met with their financial planner, who gave the go-ahead for her to retire early.
“It’s one of the most exciting things that ever happened to me,” says Buchanan, 64, still basking in the joy of being newly retired.
While the Buchanans have a solid foundation for their new chapter, they aren’t finished planning and they know they must remain mindful going forward. One factor that they will want to consider as they grow older is what’s known as legislative birthdays – age-based milestones that will trigger financial decisions and present choices that may affect their retirement income.
“Most of our clients are not thinking about the financial implications of these birthdays,” says Don Olmstead, CFP, of Charlotte, North Carolina, who advises individuals and families. “We have to educate many people on their options.”
Take a look at these legislative birthdays and other major milestones to see what you can do to make the most of each financial moment.
Celebrate by making catch-up contributions to select IRAs and qualified retirement plans. The catch-up provision was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 so that older individuals would be able to set aside additional savings for retirement.
Thanks to the power of tax deferral of potential earnings, catch-up contributions can potentially make a big difference in how much income you’ll have in your golden years.
For 2020, the maximum catch-up contribution for 401(k), 403(b), and 457(b) plans is $6,500 and for a traditional IRA at $1,000. The annual limit for a catch-up contribution to a SIMPLE 401(k) or a SIMPLE IRA is $3,000.
“We always recommend our clients contribute to these catch-up provisions when they can,” says Olmstead. “It truly is a gift from Congress,” he says of the letting potential earnings in an account grow generally tax-deferred.
Phil La Duke, a 65-year-old consultant from Allen Park, Michigan, didn’t give much thought to retirement planning until he turned 50. He had contributed to his 401(k) but decided he needed to get more serious. When he found out he qualified to make catch-up contributions, he jumped on the opportunity.
“I’m still not there, but I’m much closer to my goals,” he says.
What to do: Contact your financial professional or plan administrator to learn how to make catch-up contributions.
Generally, you have to wait until age 59½ to avoid an additional 10% federal tax penalty on early distributions for tapping into a 401(k) and some other retirement savings accounts. However, if you stop working for your employer the year you turn 55 or after (some public safety workers are eligible after they turn 50), you may be able to dip into certain retirement savings at your employer without incurring the penalty, thanks to what is known as the Rule of 55. The Rule of 55 applies to qualified retirement plans, including 401(k), 403(b), and 501(a) plans, but not IRAs or plan balances you may have at previous employers. In general, to take advantage of the Rule of 55, you must withdraw the money while it is still within your company’s retirement plan, rather than after you roll it over into an IRA.
What to do: Be sure to speak with your tax and legal professionals as well as your financial professional to discuss how withdrawing money now affects your future goals.
Once your children have grown and moved out, there’s room for lifestyle changes, such as downsizing, relocating to your dream city, or taking up a new hobby. “I say go travel and have some fun, enjoy life. You’ve been raising kids for a long time, and now is your time,” says Olmstead, a new empty nester himself.
From a financial standpoint, empty nesters should envision what they want their retirement to look like and analyze their future cash flow situation based on what they know now.
What to do: Communicate with your partner or family members to ensure you’re on the same page about lifestyle goals.
Half birthdays also can trigger important events that have income and tax consequences. Turning 59 ½ may make you eligible to start withdrawing money from annuities, IRAs, and qualified plans without the 10% tax penalty mentioned earlier.
What to do: Talk with your financial professional and your tax and legal professionals about how withdrawing money now will affect future cash flow and taxes.
You may find yourself wanting to develop new skills or nurture an interest you’ve had for years. Perhaps after working full time for your entire career, you want to cut back on your hours to have more time for volunteering. Or maybe you’d like to start your own business.
What to do: Reach out to others in the field for advice on the best way to get started. If you’re still working full time, see if your employer offers a sabbatical or will support your taking classes to learn a new skill.
You may be eligible to take Social Security, but there’s much to consider before you begin collecting benefits. Generally, you will receive a reduced benefit if you begin taking social security benefits prior to reaching your social security normal retirement age (which is based on your year of birth). Waiting a few years generally means reaping larger benefits in the future.
“My clients and I have a lot of conversations about this,” Olmstead says. “Generally speaking, the longer you wait, if you can, you’ll get an 8% increase in Social Security each year.”1
Drew Parker of Mercer Island, Washington, anticipated years ago that his job as a merchandising finance manager might be eliminated, forcing him into early retirement. To prepare, he contributed 15% to his 401(k), regularly added to his savings, and invested conservatively. Now that he’s no longer working, the 58-year-old plans to do what he can to delay taking Social Security when he becomes eligible.
“I’m going to try to get the bigger benefit without having to downsize,” Parker says. “It’s about having a goal and figuring out how to get there.”
Alternatively, Timothy Wiedman, 67, of Ionia, Michigan, opted to draw Social Security benefits when he reached 62. The tenured professor retired early because of health issues. He was worried about rising healthcare costs, but with careful planning and a move to a more affordable town and smaller apartment, Wiedman is able to live comfortably on his reduced Social Security benefits and a state pension.
“Everything has worked out fine, and I’m enjoying retirement living,” Wiedman says. “A long-standing plan for delayed retirement can easily be thrown into disarray by unanticipated health issues. But with sufficient planning and a bit of financial discipline, taking early retirement is a possibility that many folks can achieve.”
What to do: Everyone’s financial situation is different, so talk to your financial professional and your tax and legal professionals about when you should consider taking Social Security benefits. You can learn more about your benefit levels by visiting ssa.gov.
For most individuals, this is the year you become eligible for Medicare. If you’re retired and have Medicare Part B, if you don’t sign up for Medicare during your initial enrollment window, you'll face a 10% increase in Part B premiums for every year-long period you're eligible for coverage but don't enroll.2 If you’re still working, the size of your employer plan determines whether you need to enroll.
What to do: Contact your state’s State Health Insurance Assistance Program, which is not connected to an insurance company or health plan, for information and help with choosing a Medicare plan.
Consider helping your precious new family member start on firm financial footing. Open a 529 college savings plan in the child’s name. These tax-advantaged savings plans are designed to encourage saving for future education costs as earnings grow free of federal tax.
Other options for grandparents include setting up a UTMA or UGMA account, which are custodial accounts established by the Uniform Transfers to Minors and Uniform Gifts to Minors acts. While you serve as the custodian, the child is the account holder.
What to do: Talk to your tax, legal, and financial professionals about which account type is right for you and your family.
You must begin to collect Social Security benefits if you haven’t already started. By delaying until now, you will receive the largest possible benefit. Want to keep working? Go ahead. You can work and collect full benefits simultaneously. Remember, that benefits may be taxable depending on your income, so be sure to speak to your tax and legal professionals for more information.
What to do: Apply for retirement benefits with the Social Security Administration.
Generally, you must start taking required minimum distributions (RMDs) from your tax-deferred retirement accounts if you aren’t already doing so. This can feel unnatural after a lifetime of working, investing, and saving. You must take your first RMD by April 1 of the year after you turn 72, and subsequent RMDs must be taken annually by December 31.* If you wait to take your first distribution until April 1, you generally will need to take two distributions – one for the first RMD year and one for the second. With some exceptions, penalties for not taking these distributions can be as high as 50% of the required distribution amount. Tax and financial professionals can guide you through how to determine what owe.
What to do: Contact your plan’s custodian or your financial professional ahead of time to make arrangements and speak to your tax and legal professionals.
In Kansas, Buchanan is enjoying waking up when she wants and no longer having to rush to work. She looks forward to traveling. She and her husband plan to one day buy a second home in a temperate climate, such as Costa Rica, so that they can escape the harsh Midwestern winters.
Buchanan says she could have been more proactive and done more to bolster her retirement accounts, but she’s proud she was able to retire early.
“I just want to figure out what my passion is,” Buchanan says. “It may be traveling. It may be serving others. It may be taking up a skill I have never tried. I’ve always been busy being a mom or a wife or working. I’m just excited to see what’s out there.”
Download our legislative birthdays worksheet to keep as a handy reference and use with your financial professional.