Retirement planning is complicated enough, but throwing in a significant age difference between spouses creates extra challenges. Differing retirement dates, life expectancies, income needs, and health issues may create financial stress. The typical retirement advice isn’t enough. Here are six retirement planning strategies for age-gap couples.
Age gap couples need to plan for an overall longer retirement window—one where the timing of financial decisions is not aligned. Financial planning and determining the best strategies to support a long retirement are essential.
Although most couples want to retire simultaneously, timing retirement could be difficult for age-gap couples. Many struggle to find the perfect balance between working long enough to ensure suitable savings and retiring with enough time to travel, volunteer, or visit grandkids when both are healthy and active. Age-gap couples’ combined retirement could easily last 35+ years.
Even though it would be ideal for age-gap couples to retire simultaneously, early retirement for the younger spouse can be costly. It not only puts a dent in retirement savings via earlier withdrawals instead of deposits, but it could reduce the younger spouse’s Social Security check. Benefits are calculated by averaging the highest 35 years of pay. If early retirement means you won’t reach 35 years, you’ll receive zeros for the missing years, reducing your Social Security benefit.
Don’t forget about health insurance if you retire before Medicare eligibility at age 65. This can be a considerable expense, and the decision to retire before age 65 should not be taken lightly. For the younger spouse, sticking with your job for a few more years will increase your retirement savings and provide health benefits.
How can age-gap couples coordinate their retirement dates?
There has to be a detailed cash flow analysis to determine how the couple’s finances will hold up in retirement. This will determine the strengths, weaknesses, and possible strategies. This projection will include guaranteed income sources, expenses, and how retirement savings will supplement any shortfalls.
If simultaneous retirement is problematic, then it comes to a few choices.
- Ramp up savings to allow both spouses to retire at the same time
- Reduce debt/expenses
- Plan to stagger retirement dates, reducing the need to draw down the portfolio and helping the nest egg last longer. The younger spouse may continue to work, save for retirement, and maintain employer health coverage until one or both partners are eligible for Medicare.
If the older spouse is eligible for a pension, taking it as a joint-and-survivor annuity could be valuable. There is often the option of a 50%, 75%, or 100% survivor benefit. Your surviving spouse will receive that percentage of the monthly check for the rest of their life after the older spouse passes away.
One thing to remember is that the pension amount will consider your spouse’s age and life expectancy. A 65-year-old retiree signing up with a 52-year-old spouse will receive a smaller monthly pension than when the spouses are of similar ages.
The pension option best for age-gap couples depends on the overall retirement savings and age difference. The 100% survivor pension makes sense for couples with little retirement savings, where the survivor would rely heavily on Social Security with little other income.
Another option would be for the older spouse to take the single life pension, using the increased monthly income to buy a life insurance policy. When the older spouse dies, the surviving spouse receives the tax-free life proceeds.
There are many variables. Is the older spouse insurable? Can they even get a life insurance policy? What is the cost? Are the annual premiums worth the potential benefit? The key is obtaining a policy that provides a higher payout than what would have been received by selecting the 100% joint and survivor option. A Break-even calculation should be done to see when this makes sense.
Be Strategic About Social Security
The Social Security claiming decision is crucial for age-gap couples since the younger spouse may live much longer than the older one. The Social Security survivor benefit could make or break the later retirement years.
If the older spouse is the higher earner, it could be beneficial for them to delay taking benefits until age 70. The benefit will grow by about 8% for each year of delay, and the survivor benefit will also be higher. With a significant age gap, it is more likely that the younger spouse might collect a survivor benefit for an extended time. Beware, you will not receive both a survivor benefit and your own retirement benefit. Social Security will only pay the higher of the two amounts.
Another good strategy when the older, higher-earning spouse delays their Social Security is for the younger one to claim their own benefit if they’ll eventually receive a higher survivor benefit. It may even pay to claim a reduced benefit as early as age 62. Claiming your own benefit won’t affect survivor benefit.
There are numerous scenarios based on the age and earnings of each spouse. Visit the Social Security Administration’s Retirement Estimator to learn what your benefit, and that of your spouse, is likely to be.
When you reach age 73, you must begin the required minimum distributions (RMDs) from your traditional IRAs, 401ks, and 403bs. However, a separate RMD calculation for age-gap couples allows the older spouse to take less than similar-age spouses.
To take advantage of this, you must use the Joint Life and Last Survivor Expectancy Table, also called Table II. Secondly, your spouse must be your beneficiary on a traditional IRA, 401(k), 403(b), or 457, and be at least ten years younger.
Be careful. Some custodians automatically use Table III. If your custodian calculates your RMD each year, verify that the custodian is using Table II. Otherwise, you may withdraw more than required from your retirement accounts.
For example, a 73-year-old with an IRA balance of $1,000,000 and a spouse age 73 would have an RMD of $37,736. But if married to a 60-year-old, that RMD is $34,965. Not a huge difference. However, it will add up over the years, allowing more of your retirement savings to grow for the younger spouse—the more significant the age difference, the lower the RMD amount. The key, of course, is to focus on your spending to take advantage of the RMD calculation.
Consider Long-Term-Care Insurance
One financial hazard is the possibility of the older spouse needing long-term care, which can drain a couple’s savings, leaving the younger spouse with little to live on.
One option is to buy long-term care insurance for both or only the older spouse to cover at-home, assisted living, or nursing home stays. This choice makes the most sense for couples with investable assets between $750,000 and $2 million. Unfortunately, those who can afford it are also the ones who are not at as much risk of seeing their savings decimated by long-term care expenses. The key is being able to afford the steep cost. If savings are exhausted and you need care, you will generally be covered by Medicaid.
Remember, premiums increase with age. The time to decide on LTC is when the older spouse is 50-55.
Another option is for the younger spouse to buy a qualified longevity annuity contract (QLAC) to help cover potential long-term-care costs. They can move up to $200,000 of their 401(k) or IRA into a QLAC. A QLAC provides guaranteed income when the insured needs it years later. Another benefit, the amount invested in the QLAC is excluded from the RMD calculations that kick in at age 73. The payouts, starting as late as age 85, are taxable.
Age-Gap Estate Planning
An age-gap marriage is often the second marriage for one or both spouses. Many times, they bring children into the marriage. This will complicate family dynamics.
Often, age gap spouses will make the new spouses primary beneficiaries. If the children are secondary beneficiaries, they may not see any money since the new spouse is allowed to change the beneficiary if they take over the account. Nor are they under any obligation to provide anything to their step-children.
Individuals should meet with an adviser or estate planning attorney to make accommodations for all children, new and from previous relationships. For age-gap marriages, it’s essential to have an estate plan that balances the longevity issues related to a younger spouse and ensures children from previous marriages are covered.
Family communication is vital in these situations to avoid future discord. Let the heirs in on your plans well ahead of time.
The financial planning issues in age-gap marriages present unique challenges. Working with a certified financial planning professional to address the six planning considerations can ensure peace of mind for both spouses that the retirement approach will succeed.
Have you gone through this issue? If you have questions or feedback you’d like to share, we’d love to hear your thoughts. Please leave a comment below to continue the discussion.