There is no one-size-fits-all solution to retirement planning. As any financial planner will tell you, getting the most out of your savings takes putting thought, goals, and solid steps into place throughout your career.
But that doesn’t mean the rules for retirement are changeable based on what’s right for you.
There are very specific milestones we all observe on our way to our own retirements. At each age, there are steps we should (and sometimes must) take as well as IRS rules we must follow to successfully navigate this crucial part of our lives.
Now, that doesn’t mean we don’t have some choices along the way—keep reading to learn more about what they are.
Any financial advisor will tell you to start saving as early as possible. For most of us, the first real opportunity to do so comes in our 20s, when we settle into our first full-time job or career.
Retirement planners will tell you to take advantage of company 401(k) plans. But according to a Pew Charitable Trust study, only 35% of people even have access to such a plan. Alternatively, only 13% of access to a defined benefit plan like a pension.
For those without, this can be a huge setback. As Vanguard points out, the earlier you start saving can make a game-changing impact. $150,000 contributed between ages 25 and 40 with a 6% annual return would grow into $1.1 million by age 65. Twice that saved between ages 35 and 65 at the same rate would only result in $838,000.
This shouldn’t come as a complete surprise. Common sense tells us that if you start saving earlier, you stand to make more.
If your employer doesn’t offer a plan, savings accounts and IRAs can help.
But how much?
According to money expert Kimmie Greene at Intuit, you should be saving roughly 25% of your income in your 20s.
Obviously, that’s not easy for everyone. Student loans, credit card debt, expenses for your first apartment or house can all add up quickly when you are just starting out. But even still, as Bankrate points out here, “Even if a large portion of the money you would’ve saved is going to your student loan servicer, saving even a little bit of your earnings is better than not saving anything at all.”
Your Middle Career
Whether you’ve successfully started saving in your 20s or not, by your 30s you should have a more solid plan in place. If you don’t, you’ll need to try and put even more away.
Now, your next milestone is to increase your savings and focus on allocation. According to this Charles Schwab study, this is something few do:
Less than 4% in the study have increased their contribution level five or more times. Less than 7% have changed their investment choices five or more times.
The former is not good. As income grows over the course of a career, savings should too. The latter, on the other hand, isn’t necessarily bad. But investment planners have long agreed that investment allocation and risk tolerance should be regularly adjusted in the course of retirement saving.
While your particular level of risk tolerance or investment strategy might be different, the traditional method of reallocation follows a simple formula. Subtract your age from 100. Whatever number you get is the percentage you should have in stocks. The rest goes into bonds or inflation-adjusted “safe” assets.
Obviously, that simple rule doesn’t quite capture the complexity of retirement saving. But it does show that as you age and change, so should your retirement assets.
Age 50 — Catch-up Contributions
Whether you’ve successfully navigated your career until the age of 50 or not, the IRS allows you to play “catch up” beginning at this point.
This milestone marks when both IRA and 401(k) plans open up catch-up limits. These are just slightly higher annual contribution limits to retirement plans that let you save a bit more as you near retirement.
For 401(k)s, you can contribute an additional $6,500 on top of the regular limit of $19,500 if you are 50 or older. For Traditional IRAs, the catch-up limit is an additional $1,000 on top of the regular $6,000 cap.
Age 59½ — No Early Withdrawal Penalties
This seems like the most arbitrary of retirement milestones. But when dealing with IRS requirements and rules, that’s par for the course.
When you hit 59½, you become eligible for penalty-free withdrawals from retirement accounts like 401(k)s and IRAs. By no means should you do so if you can avoid it at all. But those stiff 10% penalties for early withdrawals go away at this age.
There are a few things to keep in mind. The most important of which is that unless the withdrawals come from a Roth account, that money is still taxed. Only the early withdrawal penalty on top of the taxes disappears.
Secondly, pulling from your savings can be detrimental to your retirement funds. Obviously, with less in the account, any further gains will drop as well.
So, at 59½, the IRS allows early withdrawals without penalty. But if you can avoid it, you should probably not change anything just yet.
Age 62 — Early Social Security
This is when you can first start collecting Social Security. For many, this is a huge milestone. But there is one absolutely crucial note about this age.
If you elect to take Social Security payments at 62, you are essentially taking money from your older self. Obviously, this can’t always be helped. Some of us are better off to retire when we can. But if you can keep on working past 62 without collecting, there’s incentive to do so.
Depending on when you were born, and therefore your full retirement age, the amount you could be sacrificing to collect early can be as much as 30% of benefits.
You can find how that breaks down at this Social Security Administration page.
Age 65 — Medicare
For many, this is the main retirement milestone. It is the old milestone to start collecting full Social Security benefits. Though, for anyone born after 1937, which is likely anyone reading this, that’s changed.
The largest reason this is still an incredibly important milestone is 65 also marks the first age you can collect Medicare. For many people, who rely on employer health insurance, this is a major event.
Of course, this is not a simple one. Medicare can be complex. So, the best retirement planning advice for this milestone is to be aware of what coverage you can receive, what “Medigap” supplemental insurance you might need, and what your long-term care coverage needs are.
Health Savings Accounts (HSAs) also change at 65. If you enroll in Medicare, you won’t be able to continue contributing to HSAs even if you still work and keep a high-deductible private insurance plan. However, at 65, you’ll also be able to start taking penalty-free withdrawals from your HSA for any reason. Those are still usually taxed at your ordinary income rate.
Age 66-70 —Full Social Security
Depending on your date of birth, this is when you’ll be able to collect your full Social Security retirement benefits. As of now, the age for full benefits will be somewhere between your 66th and 67th year. This page shows you exactly at what age you will qualify.
From then until age 70, your benefits can grow even more as long as you wait. The SSA allows you to delay taking Social Security past your full age to receive it. But that’s only until you hit 70, in which case you’ll have to begin taking it.
Delaying your benefits can add up to 32% more in monthly payments by waiting this whole period. You can refer to this table to see what multiplier can be added to your Social Security payments by waiting.
Age 72 — RMDs
If you’ve done everything right, saved early and often, and built yourself a large retirement nest egg, this one is when it all comes full circle.
As noted, you can begin taking withdrawals penalty-free from retirement accounts at the age of 59½. But you don’t have to. That doesn’t mean you can just hold onto it forever.
The IRS requires you begin taking required minimum distributions out of your accounts starting at the age of 72. This previously started at the age of 70½.
You must take these distributions or face a 50% tax penalty. They also change based on account size and age. Fortunately, the IRS has a guide to required minimum distributions.
Planning for retirement is obviously a long and complex business. A lot changes in our lives throughout the year—and so do the rules.
There are some very specific actions you can take, however, as long as you prepare for each of these milestones.
As noted, retirement planning can be a very personal thing. There isn’t a one-size-fits-all solution to this enormous ordeal. But the markers along the way are pretty much universal. So, no matter what your individual plan might be, you need to be aware of these milestones throughout the process.