In 1957, at an annual birth rate of 4.3 million people, the Baby Boomer generation reached its peak. In 2016, they will turn 59 years old and be eligible to withdraw funds from their qualified retirement funds without incurring the 10% early withdrawal penalty. Many may not be ready for full retirement. Preparing for retirement takes planning and financial matters for retirement should not be ignored.
Age 59 1/2: Withdraw Retirement Funds without Incurring Penalties
At age 59 1/2, money can be withdrawn from IRAs, 401(k) plans, pensions and tax-deferred annuities without incurring the 10% early withdrawal tax penalty. Create a budget for when and how much should be withdrawal from retirement savings and remember to consider taxes. Distributions from traditional IRAs, 401(k) plans and other employer-sponsored retirement plans are taxed as ordinary income because original contributions to these accounts are tax deductible.
Earnings on qualified distributions from Roth IRAs can be taken on a federal income-tax-free basis because contributions to these accounts were not originally tax deductible. A qualified distribution is one made after age 59 1/2 and at least five years after contributions to the Roth IRA began.
Age 62: Decide When To Receive Social Security Benefits
At 62, you qualify to start receiving Social Security benefits, based on work history or spouse’s work history. If benefits are taken before full retirement age, they will be reduced at a rate of 0.5% for each month you begin taking Social Security early. When making this decision, evaluate your health and family history of longevity.
Your full retirement age depends on when you were born. For example, people born in 1957 are eligible to receive 100% of their benefits when they reach age 66 1/2 years. Those born in 1960 or later must reach age 67 to be eligible for full benefits.
Alternatively, taking benefits can be delayed until after your full retirement age. In that case, benefits will increase by 8% annually. Under current law, this increase will be automatically added each month from the moment you reach full retirement age until you start taking benefits or reach age 70.
If you continue to work and start receiving benefits before full retirement age, your benefits will be reduced by $1 for every $2 in earnings above the prevailing annual limit of $15,720 in 2016. If you work during the year in which you attain full retirement age, your benefits will be reduced by $1 for every $3 in earnings over a different annual limit of $41,880 in 2016 until the month you reach full retirement age. Once full retirement age is attained, you can keep working and benefits will not be reduced, regardless of how much you earn.
Full benefits from Social Security typically replace about 40% of an average worker’s income after retiring. Benefit levels are adjusted annually for the cost of living. In 2016, there is no cost of living increase scheduled. Depending on an individual’s overall income, or combined income of a married couple that files a joint tax return, some portion of Social Security benefits might be subject to income tax.
When you start receiving Social Security, other family members may also be eligible for payments, including qualifying children and current (and former) spouses. In addition, your family may continue to be eligible for a percentage of your benefits after you die.
Age 65: Choose Medicare and Medigap Coverage
Three months before you reach age 65, the Social Security Administration recommends applying for Medicare benefits. If you elect to receive Social Security benefits before your full retirement age, you are automatically enrolled in Medicare Parts A and B without an additional application.
Hospitalization coverage. Medicare Part A covers a portion of costs for a semi-private room during hospital stays, skilled nursing facility or hospice, after you pay an initial hospital stay deductible. It also covers some home health care. Medicare pays for up to 100 days in a long-term care facility and only following a qualified hospital stay. Other rules and restrictions apply.
If you or your spouse paid Medicare taxes while you worked, Part A coverage is free. If ineligible for free coverage, you can pay a monthly premium in 2016 of up to $411, depending on your income.
Medical insurance coverage. Even if you do qualify for Medicare Part A coverage, you may be eligible to enroll in Medicare Part B coverage. Part B medical insurance covers doctor bills for treatment in or out of the hospital, as well as the costs of medical equipment, tests and services provided by clinics and laboratories. Other medical expenses, such as routine physical exams or medications, are not covered.
When Medicare Part B covers an item, it generally pays 80% of the amount it approves (after a $166 deductible in 2016) and you pay the remaining 20%. However, Part B covers 100% of approved charges for home health care, clinical laboratory services, and flu and pneumonia vaccines.
In 2016, Part B coverage costs $121.80 a month when an individual has an annual income of $85,000 or less ($170,000 or less for married couples filing joint tax returns). People with higher annual incomes pay higher premiums.
Medigap coverage. This fills the gaps that exist in Medicare, such as co-payments and co-insurance, and a type of private health insurance that is governed by federal and state laws. In some cases, you might opt for Medicare Part C coverage, which may function like a Medigap policy administered by Medicare.
The optimal time to buy Medigap insurance is within the first six months you are 65 years old and enrolled in Medicare Part B, and medical underwriting is not required. For those with existing health conditions, this enables them to buy a policy at the same price as people in good health.
Important note. Before you travel outside the United States, find out whether Medicare will cover you while away. Generally, the coverage is limited or nonexistent. If you do not have coverage when traveling overseas, you can purchase supplemental policies to cover medical expenses incurred outside the United States, including evacuations.
Prescription drug coverage. Medicare Part D covers prescription drugs. The premium paid today is based on income as reported on your IRS tax return from the last two years. If your income from 2014 was above a certain limit, you would pay an income-related monthly adjustment amount in addition to your plan premium.
Individual taxpayers who had income of $85,000 or less in 2014 (or married couples filing jointly with income of $170,000 or less in 2014) would currently pay no additional premium for Part D coverage. The highest monthly premium for Part D coverage is $72.90 (plus your plan premium) for individual taxpayers who had income above $214,000 in 2014 (or married couples filing jointly with income above $428,000 for 2014).
Important note. You may be charged a late enrollment penalty if you go without credible prescription drug coverage through Medicare Part D or another source for any continuous period of 63 days or more after the initial enrollment period ends (three months after the month you turn 65).
Age 70 1/2: Required Minimum Distributions (RMDs)
Many people are surprised to learn that the IRS generally mandates annual distributions from traditional IRAs and qualified retirement plans once they reach age 70 1/2. You also must pay income tax on these required minimum distributions (RMDs). No mandatory distributions are required from Roth IRAs while the original owner of the account is living.
RMDs are based on account balance and life expectancy. The initial RMD is for the year you turn 70 1/2, but you can postpone that payout until April 1 of the following year. If you chose that option, you must take two RMDs in the following year: The first must be taken by April 1 and second taken by December 31. For each subsequent year, RMDs must be taken by December 31.
Penalties for not taking RMDs on time include owing 50% of the amount you should have withdrawn. RMDs also must be taken from inherited accounts.
Important note. An exception to the RMD rule is permitted for taxpayers who continue working after they reach age 70 1/2 and do not own more than 5% of the company. They can postpone taking RMDs from their employer plans until after retirement. However, they must take RMDs from qualified plans that remain at former employers. These are the plans that have not been rolled over to their current employer’s plan.
Before Your 60th Birthday
Many are forced to stay in the workforce due to concerns about rising medical costs, longer life expectancies, and insufficient retirement savings. The government requires you to make important decisions about retirement benefits and health care coverage when reaching certain ages. Also, it is important to address switching to annuities or less aggressive investments upon retirement, and paying for long-term nursing and home care without depleting the value of your estate.
Before turning 60, you should meet with your financial adviser to discuss your retirement plans. At that time, you should evaluate investment portfolios, monthly living expenses, Medicare and long-term care options, and when to take Social Security benefits and withdrawals from retirement accounts and pension plans. Planning ahead can help minimize the stress and maximize the upsides of retirement.