When it comes to retirement, your bank account is more important than your birthday. Even so, there are several key retirement ages that you will want to keep in mind as you plan.
Age 50: Once you hit the big 5-0, the government raises the contribution limits on your IRA and 401(k). For those turning 50 in 2013, you can put an extra $1,000 into your IRA and an extra $5,500 into your 401(k). That raises the contribution limits to $6,500 and $23,000 respectively. These “catch-up” contributions can be great if you still have some ground to cover in order to reach your savings goal.
Age 55: If you plan on retiring earlier than most, 55 might be a good target. That’s because there is a provision in the tax code that allows you to take early distributions from your retirement plans at age 55 without paying the usual 10% penalty. These are called 72t distributions and, as you might expect, certain rules apply. Work closely with a trusted adviser if this is an option you’re considering.
Age 59 ½: This is the magic age where the government allows you to start taking distributions from your retirement plans without paying the 10% early withdrawal penalty.
Age 62: This is the earliest date that you can elect to receive Social Security benefits. As I said in a recent article, however, claiming Social Security at age 62 is like buying a pair of leather pants: almost always a bad idea. Claiming at 62 would result in a 25% permanent reduction in your benefits. The longer you wait, the more you will get.
Age 65: This is the age that you become eligible for Medicare. If you’re already receiving Social Security benefits by your 65th birthday, you’ll be automatically enrolled in Medicare. If not, then you’ll need to actually sign up. You will have a 7-month window to enroll: 3 months before your birth month, your birth month, and 3 months after. Sign up in that window, because there are penalties if you sign up late.
Age 66: Most baby boomers can receive full Social Security benefits at age 66. Depending on when you were born, however, you might be able to get full benefits a little sooner or have to wait a little longer. Check here to see when you will be eligible for full benefits.
Age 70: Just like the Social Security Administration reduces your benefits if you retire early, they increase your benefits if you retire late. For those born after 1943, you get an extra 8% for every year you wait past full retirement age up to age 70. After age 70, there’s no benefit for waiting. Said another way, claiming Social Security benefits at 62 will result in the smallest check and claiming at 70 will result in the biggest check.
Age 70 ½: One of the key benefits of your retirement accounts is that they grow tax deferred. Uncle Sam can’t wait forever, though. Congress needs money to fund all those brilliant schemes that they’re always hatching. So at 70 ½ they start forcing you to take required amounts from your retirement accounts each year. Work closely with your adviser to determine your Required Minimum Distributions (RMD), because there is a 50% tax penalty on any amount that you should have taken, but didn’t. The RMD rules don’t apply to Roth IRAs.
Photo by louderthanever. Used under Creative Commons License.
Life is busy. One day runs into the next and then the next, a constant blur of busyness, work, errands and seemingly important (at the time at least) comings and goings. If you’re not careful, you look up one day and wonder where the last 20 years went. That’s why I spend so much time talking about being intentional. No on cares more about your life than you. If you aren’t focused on wringing the most from your days, it’s a safe bet that no one will be.
We know this, of course, but sometimes it’s good to have a reminder. It’s good to have someone come along and whisper “carpe diem” or “nothing gold can stay.” So when I came across a thought provoking video recently that breaks down our days and how we’ll spend them, I wanted to share it with you. Just click the link below for the short youtube video.
No, you didn’t miss the memo. The government hasn’t announced any plans to cut Social Security. At least not overtly. They have, however (in my opinion), been covertly reducing the value of Social Security payments for years. How?
In order to account for inflation, Social Security payments have a cost of living adjustment built in. If inflation (as measured by the Consumer Price Index) is 3 percent, payments are increased by 3 percent. This works great and everyone is happy, as long as the inflation estimate is accurate. If the government underreports inflation, however, then the raise they give you isn’t enough to offset the increase in prices.
As you may have guessed, many people believe this is happening. There have been several changes to how the government calculates inflation over the years, all of which have had the same affect: To reduce the reported inflation rate. The current Consumer Price Index (CPI) is currently around 2%. Using the methods in place prior to 1990, that number is closer to 6%. Using the methodology in place prior to 1980, that number is closer to 9% (See chart below from shadowstats.com).
I don’t know about you, but when I reflect on my expenses over the last year—property taxes, groceries, cable bill, gas, health insurance—it’s fairly evident that they increased by more than 2%. What if the actual rate of inflation is closer to 6%? How will that affect a person receiving Social Security benefits? It doesn’t take a genius to see that, if inflation is 6% and the government gives you a 2% raise, they have effectively cut your benefits by 4%. If that same pattern repeats itself for 10 years, the purchasing power of your benefits will have been cut by about a third. They are giving you more money, but that money buys less.
Warren Buffet And the Widow
All of this reminds me of a story that Warren Buffett once told about an elderly widow with a passbook savings account.
“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5% inflation. Either way, she is “taxed” in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120% income tax, but doesn’t seem to notice that 6% inflation is the economic equivalent. If my inflation assumption is close to correct, disappointing results will occur not because the market falls, but in spite of the fact that the market rises.”
Applying that same logic to Social Security, we would find it outrageous if the government cut our Social Security benefits, but seem not to notice that inaccurate cost of living adjustments are the economic equivalent. Disappointing results will happen not because the government cuts our Social Security benefits, but in spite of the fact that they raise them.
The best way to overcome this hurdle is to build your own inflation factor into your Social Security benefits. How do you do that? Rather than waiting until full retirement age or later, the average person retires at 62 and takes a roughly 20 percent permanent reduction in benefits. Rather than following their lead, if you wait a few years you can retire on full benefits. Even better, retire a few years “late” and you can add as much as a third to your annual benefit (8 percent per year for those born after 1943 to a maximum age of 70). The annual cost of living adjustment will likely still be understated, but it will be based on a much higher benefit amount.
Before signing off, I just wanted to make clear that I’m not so much criticizing the Social Security Administration as I am the methodology for calculating inflation. As government agencies go, I’ve always felt that the SSA does a good job with the difficult task that they’ve been given. I know that several people who work for the agency read this blog. If you’re one of them, I’d love to hear your thoughts (pro, con or otherwise) on today’s post so we can all understand this issue better. Just leave a comment at the bottom of the post.
Thanks and have a great week.
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