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Landmarks on the Road to Retirement

EDITOR'S NOTE: This article, originally published in the January 2010 issue of Kiplinger's Retirement Report, has been updated in March 2010.To subscribe, click here.

You may have thought the big milestone birthdays were behind you. After becoming a teenager at 13, it only got better. As the years passed, you could legally drive, vote and hail in each New Year with a glass of bubbly.

The road to retirement has its own milestones, starting at age 59 1/2, when you can take penalty-free withdrawals from your retirement plans. Although these landmarks are not as thrilling as those earlier ones, they're just as important. Your financial security could depend on watching out for these signposts.

Penalty-Free Withdrawals at 59 1/2


On the day you turn 59 1/2, you can tap a traditional IRA without incurring a 10% early-distribution penalty. You will still owe income tax on any distribution.

Roth IRA owners who are 59 1/2 are free of the 10% penalty on withdrawn earnings (those earnings are also tax-free as long as owners have held at least one Roth for five years). Converted amounts held for less than five years are freed, too, from the penalty when an account owner reaches 59 1/2.

Owners of Roth and traditional 401(k) accounts who are 59 1/2 don't pay the penalty, either. But not all companies allow withdrawals if you're still working. If you leave your employer at age 55 or older, you can withdraw money from your employer plan without paying the early-distribution penalty.

Even though you can dip into your accounts penalty-free doesn't mean you should. The longer the money can stay in a tax shelter, the more it can grow. You won't be subject to any other penalties until you're required to take minimum distributions in 11 years. "The IRS doesn't care what you do with your money from 59 1/2 to 70 1/2," says Larry Rosenthal, president of Financial Planning Services, in Manassas, Va.

The Social Security Dilemma at 62

Deciding on when to start claiming benefits depends on a number of factors: your life expectancy, your marital status and whether you're still working. If you were born between 1943 and 1954, you can collect full benefits starting at 66. You're eligible to start claiming benefits at 62, but your benefit will be permanently reduced by a certain percentage for each month you claim before your full retirement age.

Claim at 62 and your benefits will be reduced by 25%. For each year you delay claiming benefits between 66 and 70, your benefit will increase by 8%.

The decision is easy for some. If you need the income to make ends meet, take your benefits early. If you plan to continue working, delaying makes sense. Otherwise, you will lose $1 in benefits for each $2 you earn over the earnings limit of $14,160 in 2010 -- plus you take a permanent benefit cut. The earnings limit disappears at full retirement age.

Whether you take smaller benefits earlier or larger benefits later, at some point you break even, meaning that you would have received the same amount of benefits no matter when you started. If you're single and have significant health issues that will likely shorten your life expectancy, it may make sense to claim early.

However, a lot depends on your other sources of income. Henry Hebeler, creator of, says a single person who collects at 62 is more likely to run out of money at an earlier age than someone with the same savings who waits until 66. You can use a free program on his site to make your own calculations.

For married couples, the decision is more complex. Taking benefits early can hurt your spouse, particularly if he or she is much younger and earns less.

Let's say a wife earned less than her husband. She is entitled to a benefit based on her own earnings or a spousal benefit that's worth up to 50% of her husband's benefit. A spouse can collect her own benefit at 62, but she can't collect a spousal benefit until her husband files for his benefit.

If he dies first, she's entitled to a survivor benefit equal to 100% of her husband's benefit, as long as she waits until 66 to collect the survivor benefit. A priority for many married couples should be to increase the benefit for the surviving spouse. If the higher-earning husband delays until 70, his survivor will get an extra 32%, plus cost-of-living adjustments.

For many couples, a husband should claim at 70, while the lower-earning spouse should start collecting at 62, according to a study by Boston College's Center for Retirement Research. Because the husband is likely to die first, the study says, he will increase the value of the survivor benefit. The authors figured that the wife's reduced benefit will be temporary because she will eventually get the higher survivor benefit.

You can run many calculations on the Social Security Web site ( Also, learn about a number of little-known strategies by reading Boost Your Social Security Benefits.

Government Health-Care Coverage at 65

When you turn 65, Medicare coverage could be the best gift of all. But you will need to plan ahead. Enrollment periods vary among coverage plans, and you can get zinged by permanent late fees if you miss deadlines.

There are two main choices for getting Medicare. You can enroll in traditional Medicare, which includes Part A inpatient coverage and Part B physician services. If you go this route, you can choose a private Part D drug plan and supplemental insurance to cover co-payments and deductibles. The other choice is a private Medicare Advantage plan, which provides all-in-one coverage. With an Advantage plan, you don't need supplemental insurance, and most offer drug coverage.

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