Last month, a special date snuck up on me and caught me by surprise. I didn’t see it coming and thus I was a sucker for a surprise birthday party. It happened to be on a day the kids were coming over for dinner, as they do once a week. A good set up. My wife picked a couple of eight ball squash from our garden and was trying to figure out what to do with them. She asked me if she should turn them into bread or a cake. She knew what I would pick, and she was right, I suggested she make a cake.
So that evening, after we all finished dinner, she mentioned to the kids that she made a cake, would anyone like some? They all said yes. So, she went to get the cake. To my surprise, she brought the cake to the table with candles burning and everyone started singing happy birthday.
Since I was the only one not singing happy birthday, I assumed it was somehow for me. Turns out, I was 59 ½ years old that day. For those who have retired early, like me, this is a monumental date. But apparently it was not monumental enough for me to have noticed it coming. Whoever thinks about their half birthday? But 59 ½ was a monumental number for me, and it will be for you also. Let me tell you why.
All those years of putting money into retirement accounts is pointing towards this date. Because the government wants us to wait until we get older to use our retirement funds, they have set up rules and restrictions on when our retirement accounts can be accessed. Before age 59 ½, there is a 10% penalty for removing the funds unless we follow these special rules. We can have the money without penalty, like I have been doing, before age 59 ½ if we follow their rules. But after age 59 ½ the rules go away, and we are free to use the money however and whenever we see fit.
With this birthday party, I had reached the age of unlimited access to my retirement funds! There is a nice long window of unlimited and unrestricted access to retirement funds. It lasts from our 59 ½ birthday until April 1st of the year after our 72nd birthday. That is approximately 13 years of unlimited use. After that later date, the government will impose a required minimum distribution, but we are free to take more if we want.
Required minimum distributions
The required minimum distribution (RMD) is often thought of as an awful imposition. But in reality the government is simply requiring us to start paying taxes on the money we have had growing tax free for decades. We enjoy the benefit of our money growing tax free until after we turn 72.
The RMD is not a loss of money. We simply transfer a specifically calculated amount out of our retirement plan into a non-retirement account, pay some taxes and then either spend the money or let it keep growing. It really is no big deal. We just move the money to a different account and pay some deferred taxes.
I’m new rich, what now?
So, after they explained why they were singing me the birthday song, I got excited! I had completely forgotten about the 59 ½ rule. I was now free to access my retirement funds at my leisure. I suddenly felt wealthy. I never counted the money in my retirement plans as spendable, until that day. It was like I just got a big inheritance or won the lottery. What was I going to do with all that money?
The answer was……nothing. We already have more money coming in than we spend each year, so instantly having access to all the rest of my retirement funds really didn’t change any plans. But knowing I could get it sure made me feel rich.
If one is still employed and reaches this milestone, there is a special option available. Some people do not like the limited options their employer offers in their 401(k) plan. If that is you, after you turn 59 ½, you are allowed to do an in-service rollover and move a big chunk of your 401(k) into your IRA and set yourself up with unlimited investment options, including buying investment real estate with your retirement funds. But don’t do an in-service rollover if you are doing backdoor Roth IRA contributions as all the money you will have in your new rollover IRA will make the Roth conversions taxable.
Don’t retire yet
Something you should not consider is retirement simply because you can get to your retirement money penalty free. The reality is, you were always able to get to the money penalty free if you were to retire early, like I did. (You can read about how I accessed the money penalty free HERE.) Make your decision to retire independent of this special birthday. Retire because it is time for you to retire, not because you reached a certain age. Here is How I Knew it was Time to Retire.
If you hit this birthday and you feel your retirement accounts seem a little small, then you can start a catch-up provision. Once you reach age 50, you can add an additional $6,500 a year to your 401(k) and another $1,000 a year to an IRA. If you haven’t already done that, now is a good time to start.
Benefits of aging, if you ask
Don’t forget also that a lot of businesses start giving senior discounts. Some start at 55, some at 60 and others at 65. The problem is you need to ask for it to get it, they don’t just automatically give it. I remember the first time my wife, who is one year younger than me, pointed out that I qualified for a senior discount, it made me realize I was getting old. It is interesting that I didn’t feel old until I found out about my discount.
Extra emergency fund money
Even though I haven’t made any monetary changes yet, it sure feels different now. I effectively boosted my emergency fund by millions of dollars. I never thought I would have that much money in my emergency fund, but that is essentially what has happened. I have money I can spend if a need arose.
What about you? Will you celebrate your 59 ½ birthday or will it sneak up on you like it did me? Will you make any changes in your spending when your retirement funds become available without restrictions? Will you take that trip around the world you have been dreaming about? Go on a six-month cruise? Give more money to charity? Or maybe even start passing some of it on to your heirs early?
Whatever you decide, pick up additional tips on retirement in The Doctors Guide to Smart Career Alternatives and Retirement. The retirement you save may be your own.