Retirement Planning with a Younger Spouse

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In most things, age is nothing but a number—but when it comes to financial planning, age matters a lot. Retirement planning is a complex topic, and it is doubly so when you and your spouse have a large age gap.

According to the U.S. Census Bureau, about 9 percent of all married couples have an age gap of 10 years or more. Among men who are newly remarried, about 20 percent have a spouse who’s at least 10 years their junior, versus 5 percent of men in their first marriage, according to the Pew Research Center.

If there are 10 or more years between you and your spouse, the standard advice doesn’t apply to your retirement plan. Couples with a large age gap face a different longevity risk, sequence risk, and risk capacity. You’re faced with the task of bridging differences in retirement funding and health care coverage for your younger spouse after you retire.

A mixed-age couple must synchronize their retirement plans to account for differences in retirement dates, life expectancy, health, and other factors. Ensuring that the younger half of the pair will have sufficient income to last the duration of his or her life—and perhaps, several years as a widow or widower—is the most crucial aspect of planning for these couples. 

When deciding how much to save for retirement, your retirement nest egg must sufficiently support both spouses who are at different stages in their careers and lives. A big gap puts a lot more pressure on a couple to sustain a stable retirement. Specifically, couples with a large age gap must plan for a much longer retirement than their peers in same-age marriages, because the younger spouse may live in retirement for many years.

This means it’s even more important than ever to have a comprehensive retirement plan. 

Age-gap couples should work toward their retirement goals together while keeping individual differences in mind. To handle a lengthy timeline, your Fiduciary Financial Advisor can utilize a number of different strategies from maximizing Social Security benefits, to setting the correct balance for your investment portfolio, to finding smart ways to stretch the assets you already have.

As we collectively face a time of economic uncertainty, smart long-term planning can also offer you peace of mind.

Let’s dive into a few considerations that mixed-age couples should be aware of while navigating the retirement planning process.

Your Retirement Date

There’s no dollar figure tied to your date of retirement, but it’s an important consideration for couples with a wider age gap. Your decision has big implications for your retirement strategy.

In terms of lifestyle: How will you go through life if one spouse continues working while the other is retired? Or, will both of you retire at the same time?

How will the younger spouse cope with going to work when the older spouse is enjoying their hobbies or relaxing at home? It works in reverse, too—what will you do when you’re ready to pack your bags and travel the world, but your spouse is still working their 9-to-5 job?

There are two ways to approach this problem. One answer is early retirement, in which case the both of you can stop working at the same time. But if one spouse loves their career and has no problem working a few more years, your answer could be deferred retirement.

It’s essential that you both sit down and clarify each other’s expectations for how the working spouse’s income will be used, how you both feel about your new roles, and how you’ll spend your time. This will help mitigate feelings of resentment by the working spouse, as well as lack of purpose in the retired spouse.

There’s also a lot of upside to staggering your retirement dates. Early retirement for a young spouse can be costly; if both spouses retire simultaneously, the couple will lose out on years of additional income and retirement plan contributions by the younger spouse. Your portfolio will come under increased pressure as it must support even more years of retiree life. 

Moreover, an early exit could also drastically reduce the size of the younger spouse’s Social Security check, especially if they’re in their peak earning years or have worked fewer than 35 years. Since Social Security benefits are based on an individual’s 35 highest-earning years, someone who is currently a high earner—but wasn’t in previous years—misses the chance to earn a higher benefit down the line. 

Now if your younger spouse continues to work, you can maintain employer health coverage until both partners are eligible for Medicare. Maintaining at least one stream of active income would enable a mixed-age couple to meet household expenses for a longer period of time. Additionally, the younger spouse’s earnings can postpone the drawdown date, thus allowing you to continue building your retirement accounts and preserving your retirement funds.

Your Retirement Income Strategy

Your main priority should be reducing the likelihood that the younger spouse will outlive a joint-nest egg. When planning your retirement finances, base your retirement savings goal, asset allocation strategies, and portfolio withdrawal rates on the younger spouse’s life expectancy. 

For instance, conventional retirement advice usually involves shifting your asset allocation mix away from riskier assets, like equities, and toward safer assets, like cash equivalents and fixed-income instruments as you grow closer to retirement. However, age-difference couples likely need to maintain higher equity allocations for longer in order to generate enough potential growth to support the younger spouse’s anticipated longer lifespan.

Another important distinction is your drawdown strategy: mixed-age couples may need to be more conservative when it comes to drawing down their portfolio, especially during the early years of retirement. To illustrate, a couple planning for a 30-year retirement faces higher risk for prematurely depleting their nest egg—and thus must withdraw more conservatively—than a couple planning for a 20-year retirement.

To determine how much growth is necessary to hit each spouse’s income target, estimate your day-to-day spending plus inflation. Don’t forget to anticipate surprise costs like unexpected home repairs and out-of-pocket medical expenses. We can help you establish individual portfolios with asset allocations that support short-term liquidity and safety needs in addition to future growth goals.

Social Security Benefits

Social Security is usually a major source of income for retirees, providing between 30 to 50 percent of your income. Age-gap couples should take a slightly adjusted approach to Social Security in order to maximize their benefit.

Generally, if the older spouse was the higher earner, they should delay collecting Social Security until age 70. When you wait to tap those funds, your benefit will grow between 6.5 to 8 percent each year, after which your younger spouse will be entitled to a higher survivor benefit. By increasing that source of fixed income, you can provide an additional financial cushion to your lower-earning spouse’s Social Security benefit.

And if your younger spouse collects Social Security benefits early, this will likely reduce their Social Security benefits for life—by as much as 30 percent! Drawing benefits early could reduce their lifetime benefits and the survivor benefit far more than many pre-retirees realize.

Let’s consider the case of Michael and Judy, a married couple with a nine-year age gap. Let’s say Michael is older and the higher earner and Judy’s benefit at full retirement age is at least half the amount of Michael’s. Michael should typically base his claiming decision on Judy’s life expectancy because when he dies, she’ll receive a survivor benefit worth 100 percent of his benefit, assuming she’s full retirement age or older when she claims it. 

That generally means Michael should wait until age 70 to claim his benefit, even if his own life expectancy is relatively short. By waiting until 70, Michael’s already-higher benefit will earn an additional 8 percent in annual delayed-retirement credits, which will also be included in the survivor benefit.

Meanwhile, Judy should base her claiming decision on the age she expects to be when Michael dies, because at that point she’ll switch from her own benefit to the higher survivor benefit. Judy 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.

It’s essential to speak with a trusted Financial Advisor to develop effective modeling of when to begin drawing your benefits.

Annuities

In addition to smart Social Security decision-making, you might consider buying an annuity to further augment income over your younger spouse’s lifetime. 

Annuities are most appropriate for couples without pensions, and who want an additional stream of income above and beyond what their Social Security benefits supply. An income stream would begin years after purchase, and you’d have an additional income stream in retirement.

Watch Out for RMDs

Required minimum distributions (RMDs) are another important consideration among mixed-age couples. At age 70 ½, you must begin taking RMDs from your qualified retirement accounts like traditional IRAs and 401(k)s. 

However, you should be aware of a provision in the tax code meant specifically to benefit mixed-age couples: If your spouse is at least 10 years younger, you can reduce the required withdrawals—and stretch your savings. Use the IRS’s joint life expectancy table to calculate the specific amounts. The larger your age difference, the smaller your RMD. That means you can keep more of your money growing in a tax-sheltered environment, thus preserving assets for your younger spouse’s longer lifespan.

To take advantage of this provision, your younger spouse must be the beneficiary on any traditional IRA, 401(k), 403(b), or 457 plan that you own.

Speak to a Financial Advisor to develop a spending strategy for your RMD income. For example, if you have a strong balance sheet, spend from your after-tax savings. Directing that income toward living expenses could free up additional money in your younger spouse’s paycheck for maxing out another retirement account, like a 401(k) or health savings account.

In another example, if your joint modified adjusted gross income (MAGI) is below $196,000 in 2020, you can funnel RMDs and other income into a Roth IRA. Roth IRAs have no age cutoff, so you can move one spouse’s retirement withdrawals back into the other spouse’s retirement savings. It could also help prevent you from moving up a tax bracket; the bump in income from the RMD is offset by the reduced taxable income reported by the younger spouse.

Backdoor Roth IRA

What if you want to do away with the hassle of RMDs altogether? Consider a Backdoor Roth.

If you’re already in the highest tax bracket and anticipate a sustained high income in retirement, think about making a conversion now. As of 2020, the top individual income tax rate was reduced from 39.5 percent to 37 percent. Income tax rates are unlikely to be lowered further in the future, so consider locking in that lower rate through a Roth conversion now, as opposed to paying taxes on RMDs each year at an unknown, future tax rate.

Regardless, it’s a good idea to time a conversion with one spouse’s retirement, when the household income sees a significant dip. You may see big savings on your tax bill if you move down an income tax bracket. You can also stagger the conversion by converting a portion—for instance, 25 percent of the IRA each year over five years—to keep from entering a higher tax bracket.

Though there are many tax benefits to be had, a Roth conversion can also have some unintended consequences. For instance, increasing income above specific MAGI levels could create more unexpected tax in other areas. 

In addition to the immediate tax impact, also consider how it may influence your healthcare premium. If your younger spouse is under age 65 and plans to buy subsidized health insurance through a public exchange, the resulting boost in income from a conversion could reduce the potential amount of assistance. Pay special attention to your MAGI levels if you’re enrolled in a public exchange health plan or Medicare; each has their own MAGI tables to monitor where you might need to pay extra taxes. 

Always consult a trusted Financial Advisor before converting a traditional IRA to a Roth IRA.  

Your Pension

If you’re entitled to a pension, ask your Fiduciary Financial Advisor whether it makes more sense to take the joint-and-survivor payout option versus taking the lump sum and rolling it over to an IRA.

With the joint-and-survivor payout option, you’ll trade a higher monthly check in order to preserve payments to your younger spouse. After you die, your spouse will receive 100 percent of your pension for life. This can provide huge financial relief to mixed-age couples, as it ensures yet another stream of retirement income to last the duration of the younger spouse’s life. It’s especially important if the younger spouse needs to cover medical and personal care costs for their aging spouse, and even more so during those widow or widower years.

Finally, consider how the joint-and-survivor annuity can help you save on medical costs. If both partners worked and saved for retirement, there may be situations in which the surviving spouse doesn’t need the survivor pension benefit for income but does need it for access to health insurance.

Your Investment Portfolio

Conventional retirement planning advice says to transition your investment mix from a more aggressive portfolio to a conservative portfolio of assets. After all, it makes sense to transition from a growth-oriented strategy to a wealth-preserving one as you age. However, this advice doesn’t apply if your spouse is significantly younger. 

With a decade-younger spouse, you’ll need to invest for an extended drawdown period. It’s a mistake for couples to base their entire portfolio on the older partner, as the younger spouse could potentially miss out on additional growth and earnings. The retirement bucket needs to last through the younger spouse’s life expectancy, which could be an extra 15 years beyond the older spouse’s passing.

So what should you do?

In general, your equity exposure needs to remain higher than that of your peers with same-age spouses. Maintain a slightly more aggressive portfolio later in life than what’s typically recommended for couples who are closer in age. That way, you can capture enough growth to support both of your retirement time horizons. 

Taking this approach will also help you outpace inflation. Even though you have higher risk for losses during a market decline, your younger spouse can help offset them with ongoing contributions if they’re still working. If it makes you nervous to allocate a higher percentage of your financial assets to stocks, you’ll have to plan on a lower level of spending.

Consult with a trusted Fiduciary Financial Advisor to work out a balance that factors in your investment income, risk level, and any fixed-income assets or other financial products you may own. 

Your Retirement Spending Strategy

Making your nest egg last for 25 years takes careful budget planning. For age-gap couples facing 35-plus years in retirement, it’s even more important to develop a spending plan.

For same-age couples, the standard withdrawal recommendation hovers around 4 percent, with a raise for inflation in each subsequent year. This tends to work well when each partner retires at the same time and makes withdrawals at the same rate throughout retirement.

But when a mixed-age couple wants to retire, the withdrawal rate drops to what is appropriate for the youngest person. For an age-gap couple—say, one in their 60s, one in their late 40s—the withdrawal rate would need to be scaled back to a more modest percentage, likely around 2 to 2.5 percent.

Your safe withdrawal rate also depends on how much guaranteed income you have. For instance, if you’re a couple with 95 percent of your income guaranteed, you’d be able to withdraw 5 percent per year. If you have only 5 percent guaranteed income, expect to take out 2 percent per year.

Consult with a Fiduciary Financial Advisor who can help you create a retirement financial model that accounts for your full unique financial situation.

Retirement Tools for Strategic Planning

When planning for retirement with a younger spouse, your financial portfolio can benefit from additional retirement tools. Strengthen your retirement plan with strategies to maximize your health insurance, long-term care insurance, and life insurance.

Health Insurance

For any couple, health care expenses can quickly deplete in your nest egg. According to a Milliman report, a healthy 65-year-old couple retiring in 2020 is projected to spend approximately $351,000 in today’s dollars ($535,000 in future dollars) on health care over their lifetime. And a healthy 45-year-old couple is projected to spend approximately $505,000 in today’s dollars ($1.4 million in future dollars).

As a mixed-age couple, your retirement plan needs to build in greater expenses in your later years to account for rising health care costs. 

When deciding on each partner’s retirement timing, consider the issues of Medicare eligibility and health insurance coverage for the younger spouse. If the younger spouse wants to retire around the same time as the older spouse, there may be a sizable gap before becoming eligible for Medicare.

If the older spouse covers the couple’s health insurance and switches to Medicare at 65, the younger spouse will need to buy an individual health policy. Plan around this by setting aside a separate bucket to pay for health care for your younger spouse. 

If you don’t have enough assets to do so, the cost of health coverage can be a deal-breaker. Health insurance is currently an uncertain market, with premiums going up. Don’t underestimate the value of staying employed if it provides health coverage! If the younger spouse maintains employer health coverage, that could also become the supplemental policy for the older spouse who is on Medicare.

Long-Term Care Insurance

The threat of huge medical bills looms as a possibility in every retiree’s future. For age-gap couples, that risk is magnified. An older spouse who needs extensive long-term care could potentially exhaust the nest egg, leaving the younger spouse with little to live on for the rest of their life.

Age-gap couples do have one retirement advantage when it comes to long-term care: Younger spouses can act as caregiver to a sick older spouse if needed. But what about the younger spouse’s long-term care needs?

Here’s one option to add some financial security: Buy long-term care insurance, particularly hybrid products that combine long-term care coverage with life insurance. Long-term care insurance usually covers in-home care services and nursing home costs for a certain length of time. A surviving spouse could also use the life insurance proceeds to supplement retirement savings. 

One thing to keep in mind: the premiums are steep, and they increase with age. Begin researching this option when the older spouse hits their mid-50s, when health problems haven’t yet appeared, and the insurance coverage won’t be onerously expensive.

Speak to a trusted Financial Advisor to help create a long-term care plan that ensures you and your spouse can afford the help you might need without creating excessive financial strain.

Life Insurance

Life insurance is another option to help you protect your younger spouse’s retirement security. It could help cover a savings and longevity difference; the younger spouse can spend more comfortably while the older spouse is living, knowing that the bucket will be replenished upon their death. 

Term life insurance is popular because it’s a cost-effective way to provide a benefit to your family after you pass away. However, an older spouse in a mixed-age marriage should consider a permanent life insurance policy instead.

The death benefit of permanent life insurance is generally income tax-free when the policy owner dies, and can be used to support the younger spouse later in retirement. Some policies offer a rider that allows you to receive a tax-free advance on the death benefit to help cover the costs of long-term care. That way, the younger spouse won’t have to deplete retirement savings to care for the older spouse if health conditions arise. Or, the younger spouse could use the funds from the death benefit later in retirement.

Getting Mentally Prepared

Financial planning is vital for mixed-age couples nearing retirement age, but there’s also a psychological aspect. While the older spouse may be looking forward to the freedom of sleeping in, having a full day of leisure activities, and possibly launching a new venture, the younger spouse will still need to finish out their career. 

Now is the time to hash things out: Will there be guilt or frustration if one retires and the other continues working? And how long is too long—what if the younger spouse is ready to retire and see the world, but the older spouse no longer has the energy to keep up?

Always remember to discuss your lifestyle goals for retirement in addition to your financial goals. Talk about what’s most important to you and find a compromise. Approaching retirement on the same page will result in success for both parties.

We Can Help

Needless to say, mixed-age couples are contending with several moving parts. When you’re faced with unique circumstances like a large age gap, it’s imperative to have a well-founded retirement strategy. There are a lot of ways to get off track and the stakes are far too high.

Rest assured that there is a retirement strategy for any couple—regardless of differences in age or life stage.

As your Fiduciary Financial Advisors, we’ll help you understand your options, then develop a comprehensive retirement plan that best suits your needs.

Our goal is to give you a clear view of the steps ahead as you enter your next chapter of life.

If you’re interested in professional guidance in planning your mixed-age retirement, please fill out the form below. We look forward to speaking with you.

DISCLAIMER: Advisory Services offered through Prosperity Financial Group, Inc., an Independent Registered Investment Advisor. Securities offered through Fortune Financial Services, Inc. Member FINRA/SIPC. Prosperity Financial Group, Inc. and Fortune Financial Services, Inc. are separate entities.

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