For those of you who are contemplating retiring soon, you will be joining the approximately 10,000 Baby Boomers who are turning age 65 every day. By 2060, there will be 98 million Americans age 65 or older, making up 25 percent of the general population.¹
This large group of retirees will have to make many important decisions. You only get one chance to make some of these decisions. The errors can be costly, but are easily avoided. I’d like to explore some of these danger areas, as well as ways to stay out of trouble.
DON’T CLAIM SOCIAL SECURITY BENEFITS TOO EARLY
Although it’s possible to start receiving Social Security benefits as early as age 62, it might not be the best thing to do, depending on your circumstances. When you start taking Social Security benefits at age 62, you receive a reduced level of benefits permanently for your lifetime. This is because you’re triggering benefits before your Full Retirement Age. If you were born between 1943 and 1954, your Full Retirement Age is 66. If your birthday falls between 1955 and 1959, your Full Retirement Age is 66-67. Finally, those born in 1960 or later have a Full Retirement Age of 67.
As a rough rule-of-thumb, your Social Security benefits increase by about 8% for every year that you wait to start benefits. Therefore, if you start Social Security at age 67, your benefit will be about 40% higher than if you started it at age 62. This can make a significant difference in your lifestyle if you live a long time.
If you wait to age 70 to collect Social Security, your benefit will be about 64% higher compared to age 62. However, it doesn’t pay to wait beyond age 70, because there are no increases after that point.
ENROLL IN MEDICARE AT THE RIGHT TIME
If you’re already enrolled in Social Security and you’re approaching age 65, you will automatically receive your Medicare card 3 months before your 65th birthday, and your coverage will start at the beginning of the month in which you turn 65.
However, if you have not yet started Social Security when you turn 65, you have to remember to enroll yourself. You have to do it within a six-month window, starting 3 months before your turn 65, to 3 months afterwards. It’s best to pay a visit to your Social Security office 3 months before your turn 65, so your coverage can start as soon as you turn 65.
If you miss the six-month Initial Enrollment Period window, you will pay a penalty of 10% of the Part B premium for every year that you delay. This penalty is permanent, for as long as you receive Medicare.
DON’T FORGET TO TAKE YOUR REQUIREMENT MINIMUM DISTRIBUTION (RMD)
Want to avoid a 50% penalty? Don’t forget to take your annual Required Minimum Distribution, starting at age 70 ½. If you don’t take your RMD like you’re supposed to, the IRS can take 50% of what you were supposed to take.
This rule applies to the money in your retirement accounts, like Individual Retirement Accounts (IRAs), employer-sponsored plans like 401(k)s and 403(b)s, and those created by self-employed individuals, like Simplified Employee Pensions (SEPs). Because the Internal Revenue Service wants to collect taxes on this money, it requires you to start taking out some money (and being taxed) from these accounts every year starting at age 70 ½.
The annual RMD is not a large amount, about 4% at age 70 ½. For example, if you were age 70 ½ this year, you would take the cumulative value of all of your retirement accounts on December 31, 2016, and divide this sum by a denominator based on your age. At age 70 ½ the denominator is 27.4, making your RMD about 4%. In reality, your investment management company or Certified Financial Planner™ should do this calculation for you each year, and make sure you receive your distribution before the end of each year.
Fortunately, the rest of your money can continue to grow, tax-deferred. Many people are under the impression that once they turn 70 ½, the value of their retirement accounts will dwindle each year. This is certainly possible if you have your retirement accounts in a bank savings account or CD. If you have to take out 4% or more each year, and the account is earning 1% or less, the balance will eventually disappear. However, in a broad, globally-diversified portfolio of investments, it’s very possible to get an average return higher than 4% per year. Even though you have to take Required Minimum Distributions, you retirement accounts can still grow. Potentially, you can pay for your retirement expenses and still leave a legacy for your children or grandchildren.
Of course, the best choice for you on these decisions depends on your personal circumstances and goals. Consult with your CPA, Certified Financial Planner™, or estate planning attorney for advice when you are entering retirement. They can help you make the right decisions to maintain your lifestyle in retirement, and avoid needless penalties and taxes.
¹ Population Reference Bureau 1/2016