LAST REVIEWED Apr 01 2020 13 MIN READ
By Damian Davila
The path to retirement is a long one, so it really helps to have more checkpoints along the way than just your target retirement age. While having an idea of when you would like to retire is always a good idea, checking your progress at important milestones and ages is an even better one. Unless you’re already working with a financial advisor or certified financial planner, you may not have an idea of what those milestones are. To help you put together or strengthen your retirement saving strategy, let’s review some milestones on your path to retirement to plan for in advance.
In your 20s: Start contributing to your IRA and 401(k) now
Nearly 80% of U.S. full-time workers have access to an employer-sponsored retirement plan. While you may need to have worked at least from 6 to 12 months for your employer to become eligible, you should enroll the day that you become eligible. The longer that you delay setting up your retirement account, the more that you’ll need to sock away every month to reach your nest egg target.
Milestone: When you get married or have a long-term partner
Finding your soulmate doesn’t only rock your world, but also it may rock your finances. To make sure that the latter it’s in a good way, you need to take three steps once your marital status changes.
First, you need to designate your spouse or partner as the beneficiary of your retirement account. This form is so important that it may trump your will in several circumstances. To give your partner peace of mind in handling your household finances in case you pass away, allocate an appropriate portion of your retirement account to him or her.
Second, talk with your spouse about his or her retirement strategy, particularly when he or she plans to retire, how much he or she would need for retirement, what are they using to save for retirement, and how much they’re contributing to retirement. This conversation is necessary to align your retirement plans.
Third, with two income streams, it may be tempting to spend a little more on lifestyle expenses like vacations and entertainment. Rewarding yourself for your collective hard work and enjoying time together is great, but we recommend reading How to Prevent Lifestyle Creep with Smart Budgeting to make sure you don’t go too crazy.
Milestone: When your first child is born
At this point, you need to revisit the previous conversation that you had with your spouse. The newest member in your family will surely affect your plans, so you need to take a second look at your retirement strategy. Based on this, you may need to adjust your contributions, change your asset allocation, and evaluate whether or not to open additional retirement savings accounts. For example, an IRA allows you to take up to $10,000 in distributions without the 10% penalty to cover for qualifying expenses of each member of your household.
In your 30s: 1x your annual salary in savings
According to several surveys, in your 30s you should have the equivalent of your annual salary in your retirement account. This number should serve as a sign for either “keep up the good work” or a wake-up call. Besides bumping up your contributions, consider also shifting more of your monies to equities. You still have many years until retirement, so you can afford to take the swings of the market. According to Vanguard’s “How America Saves 2016” report, plan holders age 30 to 39 allocate at least 85% of their monies to equities.
In your 40s: 3x your annual salary in savings
A rule of thumb for Americans saving for retirement is that you should have about three times your annual salary saved some time in your 40s. If you just gasped, you’re not alone! Most plan holders are seriously falling behind against that benchmark. In 2015, Vanguard reported that plan holders ages 45 to 54 only had saved an average of $124,487 and a median of $50,925.
If you’re feeling a bit overwhelmed at this point, you should consider hiring the services of a financial advisor. Review whether or not it’s worthwhile to pay for a financial advisor to handle your 401(k) and other assets, what are key questions to ask if you were to hire one, and what is an alternative to hiring a financial advisor with our 401(k) Financial Advisor Checklist.
Age 50: You can start making catch-up contributions
Individuals age 50 and over can make annual catch-up contributions to give their retirement accounts a much-needed boost. In 2016, you can contribute an additional $6,000 per year to your 401(k), 403(b), SARSEP, and governmental 457(b) and an additional $1,000 to your traditional or Roth IRA. If you have fully paid your mortgage, student loans, or other financial obligations, use salary raises and windfalls to take advantage of these catch-up contributions.
Also, to make the most out of your higher contributions, revisit your allocation to equities. Depending on your retirement strategy, it may be time to start gradually switching from a growth strategy to an income strategy.
Age 59 1/2: You can withdraw from 401(k) without a 10% federal penalty tax
You’ll still be liable for applicable income taxes. However, it’s a useful date to keep in mind that you have a last resort fund in case you’re in a serious cash crunch. If your expense doesn’t qualify as a hardship withdrawal under your 401(k) plan or is one of the exceptions to the 10% tax penalty under your IRA, then it could make sense to wait until age 59 1/2 to minimize the hit.
Age 62: You become eligible for Social Security benefits
This is the earliest age at which you can claim regular Social Security retirement benefits. However, you’ll take a reduced benefit. Assuming your full retirement age is 66, at age 62 your $1,000 retirement benefit and your $500 spouse’s benefit would be reduced to $750 and $350, respectively.
Milestone: When your first grandchild is born
Here’s another opportunity to revisit your beneficiary form and update your estate plan. If you don’t have a will or estate at this point, you should definitely take the time to set one up.
Age 64 3/4: You can enroll in Medicare
Unless you’re still covered by the medical insurance of your employer or that from your spouse’s employer, you should evaluate whether or not it makes sense to enroll in Medicare to cover for expenses related to inpatient hospital care, doctor visits, and outpatient care, and prescription drugs. The initial Medicare sign-up window lasts for seven months. If you miss it, you may have to pay higher premiums for life.
Age 65: Your Medicare kicks in and you can sign up for Medigap
On the first day of the month in which you turn 65, you qualify for Medicare coverage when you’re enrolled or receiving Social Security, regardless of whether or not you have retired. On the same day, you have a six-month window to enroll for Medigap (a supplemental insurance to Medicare). Medigap can help you cover a portion of some of the out-of-pocket copays and deductibles of traditional Medicare.
Age 66 or 67: You qualify for full Social Security benefits
Individuals born before 1954 can receive full Social Security benefits once they are age 66. All those born in 1955 and on have to wait a couple of months until they can receive full benefits. However, all those born in 1960 and later have to wait until age 67.
Age 70: You can no longer receive additional Social Security credits
You can boost your Social Security check by delaying your retirement past your full retirement age. For example, individuals born in 1943 or later receive an 8% increase on their annual benefits by delaying retirement past full retirement age. However, no further delayed retirement credits are available past age 70.
Age 72: You have to keep an eye on required minimum distributions
Holders of traditional IRA plans have to start taking the required minimum distributions (RMDs) beginning no later than April 1 in the year they reach age 72. Otherwise, they would face a penalty of up to 50% of the RMDs. On the other hand, the original holders of Roth IRA plans aren’t required to take RMDs at age 72 and can continue to let their funds grow tax-free for a couple more years.
Holders of 401(k)s are also required to start taking RMDs at age 72. One way to get around this rule is to roll over the balance of a 401(k) into a new employer-sponsored 401(k). Holders of Roth 401(k)s can take the advantage of the same rule but must transfer to either a new Roth 401(k) or Roth IRA. These options are available as long as you don’t hold more than 5% of the company sponsoring the original traditional or Roth 401(k). (Note: The RMD age used to be 70 1/2, until the passage of the SECURE Act.)
Related article: Breakdown of 401(k) vs. Traditional IRA vs. Roth IRA vs. MyRA
The bottom line
In sum, accumulating enough money for a comfortable retirement isn’t a sprint, it’s a lifelong marathon. Take inspiration from a retirement mantra from Warren Buffett, “Someone is sitting in the shade today because someone planted a tree a long time ago.” As this list of milestones demonstrates, you’ll have plenty of opportunities to make necessary adjustments to your retirement plan throughout your life.
Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.