In planning for retirement, there are several important age-based milestones to recognize. Building a plan around these points in life is imperative to prevent falling behind. When analyzing these retirement age milestones, they can be separated into three phases.

Age 50 and Under (Phase One)

The most important action in this retirement age phase is saving. Creating a habit of saving and “paying yourself first” helps pave the way for success. Accumulating a sizable nest egg improves when time, market volatility, and compounding returns are on your side. Typically, people spend ~70% of their pre-retirement income in retirement.

Under 21: You can contribute to a traditional or Roth IRA if eligible. Otherwise, savings can be directed into a brokerage account. While a taxable brokerage account does not offer the same tax incentives as retirement accounts, it provides something equally as important, liquidity.

21: At this age, an employer-sponsored retirement plan [e.g., 401(k)] cannot exclude an employee from participating, assuming the necessary service requirements have been met. Retirement plans provide income tax deductions and tax-deferred growth. The employee contribution limit is $19,500 (2020), and most employers offer some sort of matching contributions.

The key to phase one is quite simply: Save. The impact of compounding returns is astonishing.

Ages 50 to 60 (Phase Two)

As you transition into phase two, you are likely in your prime earning years, and the emphasis is on increasing retirement savings, paying down liabilities, and firming up retirement goals.

50: Starting at this age, you can make retirement catch-up contributions. Check the most recent numbers, but as of 2020, you can save an additional:

$6,500 toward your employer-sponsored retirement plan [401(k), 403(b), Thrift Savings Plan, etc.)
$1,000 toward a traditional IRA or Roth IRA

55: You may be eligible to withdraw funds from an employer-sponsored retirement plan prior to age 59.5 and avoid the 10% early withdrawal penalty if you separate from service in the year you turn 55 or older.

59.5: You can withdraw funds from an employer-sponsored plan and any IRA and are not subject to a 10% penalty. Most withdrawals are still subject to federal and state taxes.

Substantially Equal Periodic Payments (SEPP) allow for penalty-free withdrawals at any age from an IRA but come with several restrictions.

The exceptions to the early withdrawal penalty should be reviewed on a case-by-case scenario.

Age 60+ (Phase Three)

In this retirement age phase, the focus shifts to risk mitigation, tax planning, health insurance, and identifying the various streams of income.

62: You can start claiming benefits from Social Security as early as age 62 and are entitled to full benefits when you reach full retirement age (FRA), which is determined by your year of birth.

Collecting benefits prior to your FRA means your monthly benefit will be permanently reduced and is subject to the earnings test. Having a plan on when to start Social Security retirement benefits is important.

As your age increases, you can earn delayed retirement credits of ~8%/year by postponing benefits up until age 70. Typically, a minimum of 40 work credits (~10 years of employment) is required to receive benefits unless collecting widow or spousal benefits.

65: Medicare enrollment eligibility commences three months prior to age 65. This can be delayed if your employer offers group health insurance and has more than 20 employees. In most cases, it can’t hurt to enroll in Part A when eligible, as Medicare can serve as your secondary insurance.

72: At this age, required minimum distributions (RMDs) take effect (until the passage of the SECURE Act, the age was 70.5).

RMDs are an amount that must be withdrawn annually from retirement accounts. The amount is calculated by dividing the December 31st balance of the prior year by your life expectancy factor.

As part of the coronavirus stimulus package, RMDs for 2020 were suspended.
The lone exemption to RMDs applies to those who are employed with an active employer-sponsored plan and do not own more than 5% of the business.

As you enter the retirement phase, there are many things to consider, and each decision has a direct impact on the other, which makes them of the utmost importance. In addition to the items mentioned above, strategies such as Roth conversions, qualifying for Affordable Care Act tax credits, and qualified charitable distributions (QCDs) can come into play.

Our Bethesda, MD financial planning firm understands that everyone’s situation is unique in its own right. That’s why we suggest you work with a financial advisor who can help you create a financial plan that will assist you in making the best and most comfortable decision based on your financial goals and desires.

Discuss your situation with a fee-only financial advisor.

The commentary on this website reflects the personal opinions, viewpoints and analyses of the Divergent Planning, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Divergent Planning, LLC or performance returns of any Divergent Planning, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Divergent Planning, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Divergent Planning, LLC provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Divergent Planning, LLC is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.

Divergent Planning, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Divergent Planning, LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Divergent Planning, LLC unless a client service agreement is in place.

General Notice to Users: While we appreciate your comments and feedback, please be aware that any form of testimony from current or past clients about their experience with our firm on our website or social media platforms is strictly forbidden under current securities laws.