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Your Bank > Education and Advice > CNB University

11 Years of Retirement-Related Milestones

J Terwilliger 2014
James P. Terwilliger, PhD, CFP® is Senior Vice President - Financial Planning Officer and can be reached at JTerwilliger@CNBank.com or (585) 419-0670 x50630.

Remember the days when it seemed like an eternity waiting those 1-2 years until we could drive …or vote …or graduate?

Fast forward 40 or more years, and we are faced with a series of new, not-nearly-as-exciting milestones related to approaching and entering into retirement.

But now it seems like the time between them is moving much more quickly. Or haven’t you noticed? I sure have.

While these new milestones may not be as exciting as those in our youth, they are of critical importance to our ultimate quality of life in retirement. Many trigger decisions that can impact our lives significantly.

Let’s explore a few.

59 ½ - Retirement Plan Distribution Penalty Disappears: With a few exceptions, distributions from tax-deferred IRAs and employer retirement plans generally carry with them a 10% federal tax penalty in addition to federal and state income taxes on the distribution amount. This penalty vanishes at age 59-1/2.

Additionally, for New York State income tax payers, distributions from such plans after this age, up to $20,000 per taxpayer, is exempt from NYS taxable income each year.

60 – Social Security Survivor Benefits First Available: Widowed spouses can first access survivor benefits at age 60 at a reduced level – 28.5% lower than the full benefit available at the survivor’s full retirement age (currently age 66). The full benefit most often is equal to the deceased spouse’s actual benefit although it can be higher or lower if the deceased spouse had not yet started Social Security. The marriage must have lasted at least 9 months, and the surviving spouse cannot have remarried prior to age 60.

The same benefit is available to divorced individuals if the marriage lasted at least 10 years.

Survivor benefits can be received while still deferring one’s earned benefits, ultimately switching to enhanced earned benefits later.

62 - Social Security Earned or Spousal Benefits First Available: Folks can first access their own earned benefits or spousal benefits, whichever is greater, at age 62 at a reduced level – 25% or 30% lower, respectively, vs. the benefit available at full retirement age. An unreduced spousal benefit generally is equal to one-half of the other spouse’s full retirement age benefit. A spousal benefit cannot be taken unless the other spouse has at least filed for his/her own benefit.

Spousal benefits are also available to divorced individuals based on the ex-spouse’s work record. If the divorce occurred at least two years prior, it is not necessary for the ex-spouse to file for benefits, but the ex-spouse must be eligible to file. Again, the marriage must have lasted at least 10 years.

65 – Retiree Medicare First Available: Generally, folks must apply for Medicare Parts A and B at age 65 if they want to avoid a penalty later. An exception applies if covered by a “creditable” employer health insurance plan with a company having at least 20 employees. Folks who are already receiving Social Security benefits will automatically be enrolled in Medicare Part A at age 65.

Once enrolled in Medicare Part A, those still working and covered by a company plan cannot participate in a Health Savings Account (HSA), associated with a high-deductible health insurance plan. But they can participate in a Flexible Spending Account (FSA). Both allow pre-tax set-asides for out-of-pocket health care expenses, although the former is more flexible.

66 – Full Social Security Benefits Available: This is the current full retirement age. Starting one’s earned benefits at this point offers a number of advantages, including 1) enjoying full earned benefits and 2) allowing a spouse to start receiving spousal benefits. This is the earliest age at which one can “file and suspend” which allows a spouse to receive spousal benefits but still defer the start of one’s earned benefits.

Age 66 is the age at which spousal benefits are maximized – the optimal age for a homemaker, for example, to start receiving spousal benefits. It is also the earliest age to elect to start spousal benefits if choosing to defer one’s enhanced earned benefits to a later age.

70 – Social Security Earned Benefits Maximized: By waiting until age 70 to take earned benefits, the monthly payment is enhanced by 32% compared to the full retirement age benefit. This deferral strategy also maximizes survivor benefits for a married couple regardless of which spouse passes first.

70 ½ – Triggers the Start of Required Distributions from Tax-Deferred Accounts: Annual distributions from tax-deferred IRAs and employer retirement plans must begin after a retiree reaches age 70 ½, either that year or the following year. If the latter, both the first and second year of distributions must be taken that following year. The minimum distribution amount is based on age, following the IRS universal life table, and the account balance on December 31 of the preceding year. The portion the account that must be distributed starts at just under 4% and increases annually.

Use caution when trying to find your way through this time maze and avoid potentially costly mistakes. Partnering with a trusted financial planner to help you through is your best bet.

This material is provided for general information purposes only and is not a recommendation or solicitation to buy or sell any particular security, product or service. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.