When It Comes to Retirement, 70 Is a Magic Number
If you are approaching retirement, maximizing your potential income is likely on your mind, and it can pay to plan ahead. Gail Buckner, CFP, our national financial planning spokesperson, reminds us of the importance of turning 70 when it comes to two potential key sources of retirement income—Social Security and your retirement accounts.
A Reminder for Those Turning 70
Seventy can be a watershed age, and not just because you have more candles to blow out. It happens to be one of those birthdays that Uncle Sam cares a lot about. And so it’s one you should care a lot about, too.
When it comes to the Social Security side of the income equation, if you haven’t filed for your benefit yet, you ought to do so a few months before your 70th birthday. You might ask: Why would I delay receiving my monthly Social Security check when I can start as early as age 62? The answer is related to income. If you want to maximize your Social Security benefit, it may make sense to wait. Perhaps you have other sources of income—such as from a job or investments—that can carry you for a few years. Thanks to something called the Delayed Retirement Credit (DRC), for every 12 months past the age you are eligible to fully collect benefits (Full Retirement Age or FRA for short) and you postpone filing for them, your monthly Social Security check will increase by 8%. If your FRA is 66, waiting four years (until age 70) to start taking Social Security results in a benefit that is at least 32% larger. However, Uncle Sam’s generosity comes to a screeching halt when you turn 70. That’s when DRCs stop.
Just to be perfectly clear: There is no upside to delaying the start of Social Security past age 70.
Age 70 and Your Retirement Accounts
Not only is 70 an important milestone when it comes to Social Security, it’s also important when it comes to your retirement accounts. A serious “age 70” mistake would be to forget that you must start taking Required Minimum Distributions (RMDs) from most retirement plans once you turn 70½. In most cases, you did not pay income tax on the money that you contributed to these plans over the years. RMDs are the government’s way to make sure it collects those taxes.
Caution! The rules about required withdrawals are similar, but not exactly the same, for different types of retirement accounts.
For instance, say you have a traditional 401(k) account. If you are 70½ or older, are still working for the employer that sponsors the plan, and you do not own 5% or more of the company, you don’t need to take RMDs until you stop working for that employer.1
In the case of 403(b) plans, which often cover public sector workers such as teachers, police officers and firefighters, there are also required distributions starting at 70½. However, RMDs do not apply to plan contributions made before 1987.2