Retirement decisions are always complex. But they can be doubly so when a big age gap between spouses means wide variations in retirement dates, life expectancy, health and other factors. Much of the standard retirement advice may not work for age-gap couples. “You have to throw away the playbook that you would use for a couple retiring at a similar age,” says Steve Parrish, co-director of the retirement income center at The American College of Financial Services.
About 9% of all married couples have an age gap of 10 years or more, according to the U.S. Census Bureau, but large age differences become more common in later-life second marriages. About 20% of heterosexual remarried men, for example, have a spouse at least 10 years their junior, versus 5% of men in their first marriage, according to the Pew Research Center.
When it comes to retirement planning, these couples often feel they’ve fallen out of step, advisers say. Here are five common problems that age-gap couples face—and tips for synchronizing their retirement plans.
Problem 1: We Can't Agree on a Retirement Date
Perhaps the older spouse is more than ready to retire, while the younger is just hitting her stride and has no intention of slowing down. How can they coordinate their retirement dates? Advisers offer a simple answer: Don’t even try.
- Staggered retirement dates can be a boon for age-gap couples. A younger spouse who continues to work, for example, might maintain employer health coverage until both partners are eligible for Medicare, and her earnings can reduce the need to draw down the portfolio, helping the nest egg last longer.
Problem 2: We're Confused About Social Security
The Social Security claiming decision is critical for age-gap couples. That’s because the younger spouse may live decades longer than the older partner, and a Social Security survivor benefit could make or break her later retirement years.
Consider a couple with an age gap of eight years or more. Let’s say the husband is older and the higher earner, and the wife’s benefit at full retirement age is at least half the amount of her husband’s. The husband should typically base his claiming decision on his wife’s life expectancy, because when he dies, she’ll receive a survivor benefit worth 100% of his benefit, assuming she’s full retirement age or older when she claims it. That generally means the higher earner should wait until age 70 to claim his benefit, even if his own life expectancy is relatively short, says William Reichenstein, principal at Social Security Solutions. By waiting until 70, the higher earner’s benefit will earn 8% a year in delayed-retirement credits, which will be included in the survivor benefit.
The wife, meanwhile, should base her claiming decision on the age she expects to be when her husband dies, because at that point she’ll switch from her own benefit to the higher survivor benefit. More often than not, Reichenstein says, the lower earner in this scenario should claim her benefits sooner rather than later—even claiming reduced benefits as early as age 62. Claiming her own benefit early won’t affect her survivor benefit.
To find your optimal claiming strategy, try a free calculator such as OpenSocialSecurity.com, or use a paid service such as Social Security Solutions, which offers claiming strategies starting at about $20.
Problem 3: We Don't Know Which Drawdown Strategy is Right for Us
Age-gap couples’ combined retirement could easily last 40 years, and their Social Security, pensions and other retirement income sources may phase in over a period of a decade or more. In such scenarios, the standard advice on safe withdrawal rates “can be misleading,” says Dana Anspach, chief executive officer of Sensible Money, in Scottsdale, Ariz. Some couples, for example, may need to make large portfolio withdrawals in the early retirement years, but their drawdown rate drops substantially after Social Security and other income sources kick in.
Instead of focusing on withdrawal-rate rules of thumb, Anspach helps clients create a timeline showing guaranteed income sources and expenses for each year. The gap between the two is the amount that must be drawn from the portfolio. She then looks at the present value of the total withdrawals to ensure the portfolio is on track to support a lifetime of spending.
Online services such as Income Strategy can help you map out a portfolio drawdown strategy and decide which assets to tap first in order to minimize your tax bill (see "How to Draw a Steady Portfolio Paycheck in Retirement").
- When you know which accounts you’ll draw from first, that will help you solve the asset-allocation puzzle. If an older spouse plans to pull money first from his IRA, for example, he should shift that account toward bonds, while a younger working spouse might tilt her 401(k) toward stocks.
Problem 4: We Might Outlive Our Money
Many age-gap couples struggling to stretch a nest egg over their joint life spans can get a little help from Uncle Sam. If your spouse is at least 10 years younger and the sole beneficiary of your IRA, the required minimum distributions that you must pull from your retirement accounts after age 70½ are reduced. Use Table II in IRS Publication 590-B, instead of Table III, to calculate the smaller RMDs.
If you are eligible to use Table II and you rely on your IRA custodian to calculate your RMD each year, “it’s a good idea to double-check the math,” says Kacie Swartz, an adviser in Austin, Texas. Some custodians automatically use Table III, she says—meaning you may be pulling more than required from your retirement kitty.
- If at least one spouse is still working and you meet the income eligibility limits, consider reinvesting any extra money in Roth IRAs for one or both of you. So long as one spouse has enough earned income to cover the contributions, you can fully fund a Roth for both spouses.
QUIZ: Do You Know the Best Social Security Claiming Strategies?
Problem 5: Health Costs Are Frightening
For a younger spouse who wants to retire before she’s Medicare-eligible at age 65, the cost of health coverage can be a deal-breaker. Younger spouses shouldn’t underestimate the value of sticking with a job—even a low-paying one—that provides health coverage.
When it comes to long-term care, age-gap couples have one advantage: The younger spouse will likely be able to care for the older spouse if needed. But what about the younger spouse’s long-term-care needs?
One option: Buy a long-term-care policy that covers only the younger spouse, says Ekta Patel, a financial planner in New York City. The premiums can be high, but “there’s a case to be made for having some long-term-care insurance, even if it funds only a portion of your needs,” Patel says. Alternatively, a younger spouse might use a portion of her 401(k) to buy a qualified longevity annuity contract (QLAC) to help cover potential long-term-care costs in her later years, Parrish says. In an employer-sponsored retirement plan or IRA, you can invest up to $130,000 in a QLAC that will provide guaranteed income starting decades down the road. The amount invested in the QLAC is excluded from the RMD calculations that kick in at age 70½, but the payouts—which can start as late as age 85—are taxable.
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