Free Retirement Advice from Uncle Sam
by Ashlea Ebeling
July 29, 2014
Age 50 is time to get serious about retirement planning, and three federal agencies have put out a toolkit to help Americans who are 10 to 15 years away from retirement get their bearings. The Retirement Toolkit, put out by The Department of Labor, The Social Security Administration and the Department of Health & Human Services, includes a timeline and links to useful reports such as Taking the Mystery Out Of Retirement Planning and A Look At 401(k) Fees.
Here’s my version of the basic timeline in the toolkit, with the addition of how to supercharge your retirement health care nest egg and where to go for the best Social Security claiming strategy advice.
Age 50: Play savings catch up. While you’re still working, begin making catch-up contributions to your retirement accounts. The annual catch-up contribution for an Individual Retirement Account is $1,000 on top of the base $5,500 annual contribution amount. For a 401(k) or 403(b) workplace plan, it’s $5,500 on top of the base $17,500 annual contribution amount.
Sign up For Social Security online. Sign up at mySocialSecurity, the Social Security Administration’s secure site. You can check your online statement to verify your earnings were accurately reported and to see what your estimated benefits will be. Note the estimates are just a starting point because of Social Security’s complexity; your total benefits will depend on how and when you choose to claim benefits.
Age 55: Supercharge a Health Savings Account. To prepare for healthcare expenses in retirement, if your employer offers a health savings account, begin making annual catch-up contributions of $1,000 on top of the base $3,300 for individual coverage and $6,500 for family coverage. And don’t use the HSA for current medical expenses; save it for later. HSAs have a triple tax advantage: contributions reduce taxable income, assets build up tax-free in the account and you can take the money out tax-free for medical expenses at any time. A 55-year-old individual who starts saving in an HSA and saves to the max could save $53,000 by age 65, assuming a 2.5% annual rate of return, according to the Employee Benefits Research Institute in a recent analysis, Lifetime Accumulations and Tax Savings From HSA Contributions.
Age 59-1/2: Tap retirement accounts, or maybe not. At age 59-1/2 you can start taking money out of your workplace retirement plan and Individual Retirement Accounts without “early withdrawal” penalties. (You can access your contributions to a Roth IRA at any time without penalties.) But just because you can doesn’t mean you have to. Once you take withdrawals, you lose future years of tax-deferred or tax-free compounding. In some cases, it might make sense to take money out of these accounts to tide you over if it allows you to delay claiming Social Security and later get a bigger benefit.
Age 62. You can sign up for Social Security but probably shouldn’t. Congratulations. You’ve reached the earliest age to collect social Security retirement benefits. But be warned that claiming before full retirement age means you’ll get a smaller check each month for life. If you were born between 1943 and 1954 your full retirement age is 66. If you born between 1955 and 1959, full retirement age increases gradually until it reaches age 67 for those born in 1960 or later. Social Security checks are like longevity insurance because they’ll keep coming as long as you live, so take the decision as to when to claim seriously. Forbes’ Janet Novack explains how thinking you know when to claim Social Security when you don’t is a big retirement mistake. And Forbes contributor Lawrence Kotlikoff, a professor of economics at Boston University and creator of MaximizeMySocialSecurity calculator, reveals 44 Social Security “secrets” here.
Age 65. Sign up for Medicare and Medicare Part D (prescription drug coverage). If you don’t feel like slogging through the Center for Medicare and Medicaid’s 152-page Medicare And You handbook, keep in mind that if you don’t sign up on time, you’ll pay for it later. Here’s an example courtesy of Forbes contributor Diane J. Omdahl, co-founder of 65 Incorporated, a Medicare education and consulting firm: Janice forgot to enroll in Medicare until after her 66th birthday. As a result, she must pay a penalty of $10.49 a month for Part B and $4.65 a month for Part D for the rest of her life.
Age 70-1/2. Tap your retirement accounts. Now it’s not up to you. Once you turn 70-1/2 the Internal Revenue Service required minimum distribution rules kick in. That means you have to take money out of your retirement accounts (not Roths), or face a stiff penalty. For example, with a traditional IRA you have until April 1 of the year after you turn 70-1/2 to take the first annual withdrawal and after that, you have to take the annual withdrawal by Dec. 31. The withdrawal amount is based on the account balance of the prior year divided by your life expectancy. The penalty for failing to do so: 50% of what you should have taken out.