Most married couples tend to be relatively close in age and plan their retirements to coincide with each other. Couples with a large age gap, however, may not be able to retire together and could face particularly challenging financial issues along the way. Careful planning can help couples with an age gap to bridge the differences in several areas in their retirement planning.
Some Issues to Consider:
Decide When to Retire:
Many couples in this scenario find it difficult to find the balance between working long enough to have a secure retirement and having the desired amount of retirement time. It might be tempting for a younger spouse to take early retirement to be able to retire at the same time as the older spouse. This will cause the early retiree to end up with a shortened timeline of Social Security contributions and miss out on years of income and contributions to a workplace retirement plan.
It is good practice to compute your retirement projection from the longest life expectancy of the couple. In doing this, you may find that the younger spouse will need to work beyond when the older spouse retires and the older spouse may also need to stay employed past the typical retirement age in order to build up more significant retirement savings.
Investment Strategy:
It is important to carefully consider how you invest your retirement savings. It may be beneficial to have the older spouse invested in safer assets and at the same time, keep long-term investments working and growing for the younger spouse. Many couples close in age can manage their retirement investments in a conservative mix of 40% stocks and 60% bonds and cash investments. Couples with a longer retirement time horizon may need to stay with a more aggressive investment strategy of 60% stocks and 40% bonds and cash investments.
Adjust your Social Security Benefits:
Couples with an age gap may want to consider postponing social security benefits of the older spouse until age 70. Not only would you receive a higher monthly benefit for the older spouse, it would lock in a higher survivor benefit for the younger spouse who could be expected to live many years after their spouse passes. Social Security’s Life Expectancy Calculator can provide information to help figure out your timetable.
Plan your pension wisely:
If you participate in a pension, you will have to choose a distribution plan when you retire. One of those choices might be what is called a Joint and Survivor Annuity, which lets you cover a surviving spouse in exchange for a lower monthly benefit. If you will not need these funds to make ends meet, it could be a great opportunity to help fund the long-term financial needs of the younger spouse as it will pay the surviving spouse 100% of your pension for life.
Take Advantage of Reducing Your RMD Withdrawals:
When you reach the age of 70½, you will have to start taking Required Minimum Distributions (RMDs) from your qualified retirement plans. If your spouse is your sole beneficiary and is more than 10 years younger than you, you may use the Joint Life Expectancy Table to calculate your RMDs instead of the Uniform Lifetime Table. Using the Joint Life Expectancy Table will result in a smaller RMD than using the Uniform Lifetime Table and will make it possible to stretch out the time for your investments to grow.
Consider Long-Term-Care Insurance:
One possible financial stressor to consider is the older spouse needing extensive long-term care in later life. If most of the financial assets go to care for the older spouse, the younger spouse could remain with diminished retirement savings to support themselves for what could be many more years. Consider purchasing long-term-care insurance. This can make sense for couples with significant earnings as lower-earning couples may not be able to afford the coverage. Keep in mind that premiums do increase with the age at which you sign up, so a good time to sign up would be when the older spouse is between 55 and 65 years of age.
Health Care:
If the older spouse is enrolled with an employer-sponsored health insurance plan, it could create a significant gap in coverage for the younger spouse when the older spouse retires or becomes eligible for Medicare. Since paying for individual health insurance can be very expensive, enroll in the less expensive option of a high deductible health plan (HDHP) as your only health insurance coverage and consider establishing a health savings account (HSA)(link). A health savings account is a type of account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses.
Some benefits of establishing a health savings account:
• Contributions are tax-deductible
• Dividends and interest accumulate tax-free
• You do not pay taxes on withdrawals for qualified medical expenses
• The account is portable and not tied to your employer
• Account balances will roll over from year to year
So, it may be time to have a conversation with your spouse to discuss how both of you envision your retirements and the strategies that will help you achieve more successful and rewarding retirements. Since couples with an age gap often have financial complications that same-aged couples do not, planning for these possible complications can help make your desired retirement lifestyle a reality.
Carol Chaudet
(Updated 6/18/2018)