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Lifelong Financial Planning: Planning Through the Ages

Next month is a big birthday month in my house. My daughter turns 4 on mid-month, my wife turns [muffled noises] the next day, and then my son turns one about a week and a half later. That 1st birthday is always fun, complete with the obligatory photo of a grinning toddler with a chocolate-smeared face.

Thinking about that landmark birthday led me to think about other important ages, but from a financial planning perspective. They might not be as memorable as the ages when people can get their learner’s permit (15), provisional driver’s license (16), vote (18), legally purchase alcohol (21), rent a car on their own (25), or run for president (35), but they are critical landmarks nonetheless.

  • Age 18: age of majority; after children turn 18 they are considered to be “legally competent” and can therefore sign contracts. If the child had a Uniform Gifts to Minors Act (UGMA) custodial account established for them, then technically the child takes control of the custodial account at this age. (Note that in North Carolina, a different type of custodial account called an UTMA [Uniform Transfers to Minor Act] began superseding UGMA accounts in October, 1987. If you established a custodial account after that date, it’s probably an UTMA account. UTMAs have slightly different rules regarding the types of property they can hold, as well as when the custodial account terminates.)
  • Age 21: age at which a minor takes control of an UTMA account in North Carolina. Until age 21, the custodian for an UTMA account makes all the decisions regarding property held inside the account. This is considered to be a fiduciary role – the custodian can’t just fritter the assets away however they want to. At age 21, the child can technically use the assets for whatever purposes he or she wants, even if those desires conflict with those of the person who served as custodian or who originally funded the account.
  • Age 50: the “catch-up” age. At age 50, individuals can contribute additional amounts beyond the annual maximum to workplace retirement accounts (401k, 403b, etc.) and Individual Retirement Accounts (IRAs). The current annual contribution limits are $17,000/year to a workplace retirement account and $5000 to an IRA (either Traditional or Roth). At age 50, individuals can contribute an additional $5500 to a workplace account and an additional $1000 to an IRA.
  • Age 62: the earliest age that most people can start collecting Social Security. Exceptions apply to disabled individuals, widowed spouses, minor children of individuals collecting Social Security, and spouses caring for children of an individual who is collecting Social Security. Collecting Social Security prior to Full Retirement Age will result in a reduced benefit. For individuals whose Full Retirement Age is 66 (see below), collecting at 62 results in a 25% benefit reduction.
  • Age 65: age at which people become eligible for Medicare. At age 65, individuals should sign up for Part A of Medicare, which covers hospitalization and some other elements. This is the free component of Medicare. Whether or not you sign up for Parts B and D depend on whether or not you are still working.
  • Age 66: Full Retirement Age (for Social Security purposes) for individuals born between 1943 – 1954. Full Retirement Age represents when you can collect 100% of your projected Social Security benefit.
  • Age 70: the age at which it no longer makes economic sense to delay collecting Social Security. For every year you delay collecting your Social Security benefit between your Full Retirement Age and age 70, your benefit goes up by 8%.
  • Age 70 ½: the age when Required Minimum Distributions (RMDs) from Traditional IRAs and other traditional retirement accounts begin. Technically, you need to take your first Minimum Required Distribution the calendar year in which you turn 70 ½. RMDs are calculated by dividing the balance of the account on December 31st of the previous year by a number provided in a table by the IRS. For example, most people whose first RMD occurs when they are 70 years old would divide the account balance by 27.4 to arrive at their distribution amount. People who are still working at age 70 ½ may not have to take distributions from active workplace retirement accounts but still have to take RMDs from Traditional IRAs. (There is no Required Minimum Distribution rule for Roth IRAs or Roth 401ks.)

This list is by no means exhaustive. Depending on your situation, there might be other important ages for you and your family. For example, couples with children who establish trusts to hold assets in the event of a common accident need to think about how old their children need to be before that trust makes outright distributions. Other people might need to think about the age at which they stop worrying about paying disability insurance and instead focus on long-term care insurance.

At Woodward Financial Advisors, our job is to help provide guidance and options for any of the important ages in your financial life. And depending on the age and event, we might even throw in a chocolate cake for you, too!

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