Bookends of Retirement Planning

Ray’s Take: Planning for your financial independence can seem overwhelming with a minefield of moving parts. Achieving the dream of a secure, comfortable retirement is much easier when you know the significant numbers involved.

The first four are expenditures, portfolio return, inflation and estimated life expectancy. While the sequence of portfolio returns really doesn’t matter during the accumulation phase of life, it matters a great deal during the distribution phase. Certain retirement planning events are triggered at specific ages and knowing those ages and their significance can save you from problems, such as when you are required to take IRA distributions and the early withdrawal penalties.

Two numbers you should pay very close attention to are age 59 1/2 and age 70 1/2. They can have a serious impact on your finances.

For those with hopes to retire early, it’s imperative you know and take into consideration the 10 percent penalty for early withdrawal from certain types of accounts so you can factor that eventuality into your plan by making different decisions about which vehicles you will use to fund your finances in the early years. Life is expensive enough without paying additional penalties.

The other end of the bookend of retirement ages is 70 1/2. This is the age at which you are required to begin taking Required Minimum Distributions (RMDs) from your tax-deferred accounts, whether you want to take them or not.

Withdrawals from traditional retirement accounts become required after age 70 1/2, and each distribution is taxed at your ordinary income tax rate. If you fail to take a required minimum distribution or you withdraw the incorrect amount, the amount you should have withdrawn is penalized at 50 percent, in addition to the regular income tax you owe on it.

Without a solid retirement plan, that light at the end of the tunnel might turn out to be the headlight on a financial train wreck bearing down on you with all the speed and weight of unexpected expenses.

Dana’s Take: Why do people retire early?

Sometimes it’s unplanned like a company downsizing you out of your position. Other times, it’s a conscious decision to give you time to pursue personal interests like traveling or having more time to dedicate to hobbies or volunteering. Early retirement can also serve as a means of getting away from an uninspiring career, a toxic work environment or a frustrating job where you have no room to advance.

If you fall under the second scenario, keep in mind that retiring early may not be the answer you’re looking for. Retiring early has its own challenges – some of them financial. A career change or working part-time might be a better financial choice. And have a more positive impact on finances.

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The Magic Numbers