By Paul S. McNulty, CFP®
Of all the big milestones we reach in life, turning 70½ is not one we usually think about. First of all, it’s not even a real birthday. However, when it comes to financial planning, reaching this age is significant for a few reasons. At this age, you need to make sure you have a plan for future long-term care needs, have your estate planning documents in order, and, most importantly, begin taking required minimum distributions from your retirement accounts.
Plan For Future Long-Term Care Needs
If you don’t already have long-term care insurance in place, now is the time to address your future long-term care needs. Fifty-two percent of people turning age 65 are expected to need long-term care, and since you’ve already passed that milestone, your odds are even higher.
In 2015 alone, $225 billion was spent on long-term care in the U.S. Dementia is increasingly common among the elderly, and the lifetime cost to care for someone with dementia is estimated to be $341,840. Of people who turned 65 between 2015 and 2019, 15.2% will spend over $250,000 on long-term care during their lifetime. (1)
Clearly, long-term care is a future expense that needs to be addressed and planned for. There are several ways to plan for long-term care expenses. You can purchase a stand-alone long-term care policy, add a long-term care rider to a life insurance policy, or self-insure with savings. If you don’t have a plan in place yet, you should meet with a financial advisor to discuss your options and determine which one makes the most sense in your particular situation.
Organize Your Estate Planning Documents
Gather all estate planning documents in one place and make sure you aren’t missing any! It is important to have an updated will, advanced medical directive, and financial power of attorney.
On average, a woman turning 70½ today will live another 16.9 years. (2) While that is a long time, that doesn’t mean that you will be in a position to manage your financial life or communicate your medical desires. After all, 10% of Americans over age 65 have Alzheimer’s, and 33% over age 85. (3)
It is important to get everything set up now so that if you do get dementia or become otherwise incapacitated, your wishes are known and can be fulfilled. An advanced medical directive tells medical providers what kind of life-sustaining measures you wish to be taken and a power of attorney will give a trusted person the right to manage your affairs if you cannot. Finally, everyone will eventually pass away, so a will or trust is necessary if you want any say over the disposition of your wealth and possessions. It is best to get all of this in place now, while you are still healthy.
Begin Taking Required Minimum Distributions
When you turn 70½, one of the most important things to do is start taking required minimum distributions (RMDs) from your retirement accounts. While you can plan for your long-term care needs and get your estate planning done at any time, RMDs have a strict deadline.
You must begin taking RMDs the year that you turn 70½, and you must take them every year after that for as long as you live. The first year they are required, you can actually put off taking it until April 1 of the following year, but after that, they must be taken by December 31 each year. That means that if you put off taking your first year’s RMD until the next year, you’ll end up taking two RMDs that year.
RMDs are required from 401(k)s, 403(b)s, IRAs, and just about every retirement account except a Roth IRA. They are calculated with an IRS formula that basically takes your account balance at the end of the previous year and divides it by your current life expectancy.
It’s critical to begin taking your RMDs on time and to calculate them properly because you will otherwise face a 50% fine. That means that if your RMD is $4,000 and you don’t take it, you will owe the IRS a $2,000 penalty on top of any income taxes due on the full $4,000.
We’re Here To Help
If you’ve recently turned 70½ or will soon, be sure to begin taking your RMDs or make a plan to do so. Now is a good time to consult with a financial advisor who understands the laws and can help you develop an RMD plan that can reduce taxes and protects you from penalties. If you want help with your RMDs, long-term care planning, or any other financial topic, our team at Boston Metro Advisor is here to help. Contact us for a complimentary consultation by calling (781) 995-0253 or email me directly at [email protected] today!
Paul McNulty is the founder of Boston Metro Advisor with over 20 years of experience helping people navigate the ups and downs of the economy toward the financial future they envision. His education consists of a Bachelor of Science in business administration from the University of Rhode Island and the CERTIFIED FINANCIAL PLANNER™ (CFP®) professional designation.
Paul’s experience and education have made him a multi-faceted professional capable of assisting people with virtually all their financial needs. His services include every facet of retirement planning, from 401(k) rollover services and income planning to wealth management and estate planning. Paul has been active in his community over the years as a youth sports coach. When he’s not spending time with his wife, Cindy, and their two children, who are both recent college graduates, Paul enjoys reading, playing golf, and fishing. Learn more about Paul by connecting with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.