Top 7 Retirement Milestones You Need to Know

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Time is Money
Getty ImagesYou can't turn back the clock, but you can prepare for your retirement future.

By Kelly Campbell

Retirement planning is a process that actually continues throughout your retirement years, with tweaks and changes to ensure that you stay on track. Many folks will immediately think of their portfolio and rate of return, but your age is also an important factor that can help you maximize certain benefits, while helping you avoid mistakes, which are often accompanied by hefty penalties. Make sure to mark your calendar for these important milestones.

In order to help illustrate these points, we'll use the example a fictional 49-year-old named Claire, who was born in 1965. Claire is still putting in hours at the office, but her children are in college and she's starting to think more seriously about her retirement. Let's examine how these retirement milestones work for Claire and many others years away from retirement:

Age 50. Once Claire reaches age 50, she's eligible to take advantage of something called the "catch up" provision, meaning she can make greater contributions to her qualified retirement accounts (individual retirement accounts, Roth IRAs, 401(k)s, etc.). Claire is now able to contribute an extra $1,000 to her IRA and Roth IRA, increasing her total contribution from $5,500 to $6,500 annually. If able, she can also add an extra $5,500 to her 401(k), increasing the contribution limit from $17,500 to $23,000 annually. It's important to take advantage of this provision, if you weren't able to start saving for retirement as soon as you would have liked.

Age 59½. One of the good things about getting older, aside from getting wiser, is that Claire will be able to access her retirement savings. Age 59½ allows individuals to avoid the 10 percent "early withdrawal penalty" if an unplanned event or illness occurs. However, income tax is still assessed on traditional 401(k) and IRA withdrawals, while withdrawals from Roth-optioned accounts are tax-free if held in the account for more than five years. It's important to understand the differences between Roth and traditional accounts and assess the advantages of one over the other.

Age 62. This is the earliest age that Claire is eligible to file for Social Security benefits, but there is a catch. If Claire files for Social Security, as soon as she turns 62, then she will only be eligible to receive 70 percent of her total benefit. Also, should she decide to file and continue to work, her benefits could be partially or entirely withheld and taxed. However, if she continues to work and files for Social Security, once she has reached her full retirement age of 67, then she will receive her full retirement benefit, regardless of income.

Age 65. Once Claire turns 65, she is eligible to enroll in Medicare. This means that she no longer has to rely on employer-sponsored or private health insurance plans. An important point to remember is that filing for Social Security doesn't automatically include enrollment in the Medicare program. Claire will need to register for Medicare benefits during a 7-month window, including the three months before her 65th birthday, her birth month and three months after, to avoid possibly paying higher premiums for coverage.

Age 66 and 67. For the majority of baby boomers (born between 1943 and 1954), the retirement age will be 66. For Claire, because she was born after 1960, her full retirement age is 67, which means that she is now eligible to receive her full retirement benefit. Should Claire decide that she wants to claim her benefits at age 65 and not wait until her full retirement age of 67, then, according to the Social Security Administration, she will receive about 87 percent of her total benefit.

It's important to note as well, that spousal benefits are also affected by the decision to receive benefits early. A spouse may claim 50 percent of the higher earner's benefit. So if Claire, having the higher earnings record, decides to file at 65 and not 67, and receive a reduced benefit, then her spouse would receive 50 percent of her reduced benefit.

Age 70. If there is a penalty for drawing Social Security benefits early, there must be an advantage when you delay receiving benefits, right? That's correct. For every year that Claire delays drawing her Social Security benefit, she receives a "Delayed Retirement Credit," which is an 8 percent annual increase to her accumulated Social Security benefits. Claire decides to work a couple more years and not file for Social Security at 67, so she can receive that 8 percent increase. However, she is only able to receive the delayed retirement credit until age 70. After age 70, there isn't any advantage to delay filing for benefits.

There are numerous strategies and ways to file for Social Security and depending on your specific situation, you want to develop a filing strategy that will substantially increase your benefits over your lifetime. I strongly recommend that people do their research and develop a filing strategy that ensures receipt of the maximum benefit.

Age 70½. Once Claire reaches age 70½, she is required to begin taking required minimum distributions from her traditional retirement accounts, or she will have a 50 percent tax penalty on the amount that should have been taken out. That's a pretty substantial fine by the Internal Revenue Service. Where else can one be penalized for continuing to save money? Scheduling and taking required minimum distribution withdrawals is one of the most important things that retirees must remember to do.

Until this point, Claire's traditional qualified retirement accounts have grown tax-deferred. She has only paid taxes on money withdrawn. However, she can't keep money in her retirement accounts indefinitely, because the function of these accounts is to provide income during retirement. Required minimum distributions are a way to ensure that the government is able to collect tax revenue on the tax-deferred dollars that are held in these accounts. Required minimum distributions do not apply to Roth-optioned retirement accounts, which is a great advantage of Roth accounts.

I hope that this quick overview of significant retirement milestones, illustrates the importance of factoring your age into your retirement planning.

Kelly Campbell, certified financial planner and accredited investment fiduciary, is the founder of Campbell Wealth Management and a registered investment adviser in Alexandria, Virginia. Campbell is also the author of "Fire Your Broker," a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.

Top 7 Retirement Milestones You Need to Know
  • Cost of living -- 114.1
  • State tax burden -- 8.4 percent
  • Median house price -- $377,625, per Zillow.com
  • Climate -- 69/39 January, 105/75 July
  • Traffic congestion -- Didn't make the Forbes list
Scottsdale is a retirement mecca, with a reasonable cost of living, state and local taxes well below the national average, a great quality of life and plenty of amenities. But housing costs are nearly double the national average. Winters are warm, but summers are sizzling hot. Peak temperatures can reach close to 120 degrees -- after all, it's in the desert. The locals will dismiss it as "dry heat," but that kind of heat will still send your electric bill for air conditioning soaring, and can necessitate you buying new cars more frequently than you'd like.
  • Cost of living -- 130.0
  • State tax burden -- 9.3 percent
  • Median house price -- $417,600, per Zillow.com
  • Climate -- 74/64 January, 89/80 July
  • Traffic congestion -- Didn't make the Forbes list

Key West offers Caribbean weather in the U.S., an attribute that makes it a natural choice for retirees. And who could resist the Jimmy Buffett-Parrot Head thing, especially once you're living a life of leisure? 

You might be better off if you resist. The cost of living is 30 percent higher than the U.S. average, and housing costs at least twice as much. Travel is another issue. Key West is the most remote location in the continental U.S. The only road off the 6-square-mile island is the Overseas Highway, a 127.5-mile causeway that is largely one lane in each direction.

Hurricanes -- all too common in Florida -- are rare in Key West  -- though Wilma did hit it in 2005. But when they do impact the island, though, it's worth noting that the city has the Atlantic Ocean on one side and the Gulf of Mexico on the other, and there's no part of it that's more than 18 feet above sea level. So homeowners must pay several thousand dollars a year for hurricane insurance.

  • Cost of living -- 132.3
  • State tax burden -- 11.2 percent
  • Median house price -- $482,000
  • Climate -- 66/50 January, 77/67 August
  • Traffic congestion -- Didn't make the Forbes list
As big California cities go, San Diego is a bargain. But compared to the rest of the country, San Diego is certified high-cost. Yes, the weather is near perfect year-round. But the cost of living is one-third higher than the rest of the country, and house prices are nearly 2½ times the national average. Add in California's high state and local tax rates and the earthquake issue, and San Diego should be crossed off your list of potential retirement cities.
  • Cost of living -- 165.7
  • State tax burden -- 10.2 percent
  • Median house price -- $680,000
  • Climate -- 80/66 January, 88/75 July
  • Traffic congestion -- Second worst gridlock in U.S.
Can you imagine a more idyllic place to retire than Honolulu? Probably not. But as beautiful as it is, it shares many of the financial strains common to other cities on this list, plus a few more.

The overall cost of living is second only to New York City. After all, most of the goods people need have to be shipped across thousands of miles of ocean. The state tax burden is only slightly higher than the national average, but the median house price is triple the national average.

Finally, as far as cost of living is concerned, Honolulu has an unusual financial issue: travel expenses. Sooner or later, you'll want to get away from Hawaii. And there's no cheap way to escape from this paradise.
  • Cost of living -- 164.0
  • State tax burden -- 11.2 percent
  • Median house price -- $860,000
  • Climate -- 57/46 January, 70/55 September
  • Traffic congestion -- Third worst gridlock in U.S.
San Francisco frequently makes those "favorite cities in America" lists and for good reason. Situated on a peninsula between the Pacific Ocean and the San Francisco Bay, it is one of the most scenic cities in the world. Mild weather year-round, world class cuisine, charming neighborhoods and an eclectic population make it one of the most desirable places to live anywhere in the world.

But it has the highest median house prices in the country, which should scare off retirees. Its cost of living trails only New York City and Honolulu. And like the rest of California, its state and local tax burden is second only to New York.

One other reason people might avoid living in San Francisco is that it's prone to earthquakes. While that's certainly a concern for personal safety, few people from non-earthquake prone areas realize how it increases your cost of living. Homeowners need to pay several thousand dollars per year for earthquake insurance.
  • Cost of living -- 140.1
  • State/district tax burden -- 4.0 percent on first $10,000 and up to 8.95 percent on income greater than $350,000 in D.C., 10.2 percent in Maryland, 9.3 percent in Virginia
  • Median house price -- $395,000
  • Climate -- 43/29 January, 88/71 July
  • Traffic congestion -- 10th worst gridlock in U.S.
Washington is centrally located, is filled with historic attractions and has some of the most beautiful neighborhoods in the country. It also has one of the highest effective local income tax rates in the country. The district taxes the first $10,000 of income at 4 percent, then 6 percent to $40,000, then 8.5 percent on all income over $40,000 (you can exempt up to $3,000 in retirement income).

Like other cities on this list, Washington sports a high cost of living and some of the highest housing prices in the country. The area also has its share of toll roads, and traffic is a recurring problem. This is especially troublesome during the holidays and summer months. Interstate 95 -- which bisects the metro area -- is the principal travel corridor between the Northeast and Florida. Making traffic matters worse: the near-permanent road construction projects.
  • Cost of living -- 136.4
  • State tax burden -- 11.2 percent
  • Median house price -- $456,000
  • Climate -- 68/48 January, 83/64 July
  • Traffic congestion -- Worst gridlock in U.S.
As recently as the 1970s, Los Angeles was widely viewed as the city that all America was looking to move to -- or at least to imitate. Perfect weather, endless beaches, palm tree-lined streets, plentiful housing, a powerhouse economy and the lure of rubbing elbows with a celebrity or two. Today, about the only things L.A. has going for it are near-perfect weather and In-N-Out Burger. The rest is mostly a faded memory. The city's success was, in fact, a key contributor to its decline: The near-doubling of the metro population since the 1970s has created East Coast levels of human congestion.

Property values are higher than New York's and nearly twice those of Chicago. The state and local tax burden in California is second only to New York, and the overall cost of living in L.A. is more than one-third higher than the national average. California's unfunded pension liabilities are nearly as high as those in Illinois, threatening serious tax increases that could squeeze retirees. Nagging quality of life issues include the worst traffic congestion in the nation and smog that could lead to higher medical costs.
  • Cost of living -- 132.5
  • State tax burden -- 10.4 percent
  • Median house price -- $370,000
  • Climate -- 36/22 January, 81/65 July
  • Traffic congestion -- Ninth worst gridlock in U.S.
Boston is the quaintest large city in America, sporting centuries-old but impeccably maintained architecture, neighborhoods and surrounding communities that just ooze with charm and close access to the beaches of Cape Cod and the mountains of Vermont and New Hampshire. If Boston were a less expensive place to live, it could well be an popular and smart retirement destination.

But it isn't. The high cost of living and high housing prices are the main reasons cited by former residents for leaving the state. The state tax burden is higher than the national average; the cost of living is about one-third higher than the national average; and house prices are nearly double the U.S. median. Translation: a large chunk of your retirement income would be spent just covering basic living expenses.
  • Cost of living -- 116.9
  • State tax burden - 10.2 percent
  • Median house price -- $247,000
  • Climate -- 32/18 January, 84/68 July
  • Traffic congestion -- Didn't make the Forbes list
Based on the numbers, Chicago wouldn't seem to be the retirement financial disaster that other cities on this list are. The state tax burden is only slightly higher than the national average; the cost of living is tolerably higher than the U.S. average; and house prices -- while higher than the nation in general -- are downright affordable compared to the coastal cities.

However, in addition to being a generally more expensive place to live than the nation at large, the area faces burgeoning problems just over the horizon. Illinois faces the highest unfunded pension obligations of any other state in the country, at around $100 billion. Chicago faces a nation-leading $20 billion unfunded pension liability. Such deficits scream out for higher taxes across the board. We can only speculate as to which taxes will be raised (or created).
  • Cost of living -- 216.7 Manhattan, 145.7 Nassau County
  • State tax burden -- 12.8 percent
  • Median house price -- $972,000 Manhattan, $440,000 Nassau County
  • Climate -- 38/27 January, 84/69 July
  • Traffic congestion -- Fifth worst gridlock in U.S.
The area has fantastic amenities -– theater, music, concerts, festivals, ethnic foods, diverse and quaint neighborhoods and close access to beaches and mountains. It also has probably the most comprehensive public transportation system in the U.S. But it breaks down spectacularly when it comes to the costs. The area has close to the highest cost of living in the country, which gets markedly worse the closer you are to Manhattan. House prices are out of sight, particularly in the more desirable communities and neighborhoods. New York State has the highest state and local tax burden in the country. New Jersey has the highest real estate tax burden in the country. And nearby Connecticut isn't much better.

Weather runs from winter-time deep freezes to protracted summer heat waves. The preponderance of bridges, tunnels and their tolls -- as well as antiquated roads running through quaint town centers -- makes congestion a constant problem, even on the weekends.
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