Income Planning for Couples With Big Age Differences

Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act, a new law governing retirement savings. The SECURE Act may impact investors nearing- or in retirement, new parents, small business owners and employees. For more information about the SECURE Act, please read this article or speak with your financial consultant.

There are plenty of reasons spouses retire at different times. Maybe one partner loves her job, while the other can’t wait to quit. Maybe one is in good health, while the other must retire for medical reasons. Most often, however, couples retire at different times because of an age gap.

“If there are 10 or more years between you and your spouse, you’re probably going to have to bridge differences in retirement funding and health care coverage for the younger spouse after the older spouse retires,” says Tim Cunningham, a financial planner in Schwab’s Denver office. “By adjusting your approach to Social Security and pension payments, tweaking retirement savings and possibly contributing money to a health savings account (HSA), you can help ensure that your savings sustain you both.”

Social Security

Although payments are determined by a complex formula that factors in age, number of years worked and annual earnings, the program currently pays more if you wait to collect. Start receiving checks at the earliest possible age of 62, and you’ll get a maximum monthly benefit of $2,153 in 2017 (with an incremental increase every year thereafter). Wait until 70—beyond which there is no incremental benefit—and you’re eligible for as much as $3,538.¹

Postponing payments until age 70 may not be ideal for the older spouse, but it can be a boon to the younger one (who, for planning purposes, should expect to live longer). That’s because Social Security allows the survivor to collect the deceased’s checks for life after reaching the full age of retirement (between 65 and 67, depending on when you were born). So, by putting off Social Security payments, older partners lock in the higher rate not just for themselves but also for their surviving spouses. “That’s a biggie,” Tim says.

Retirement savings

It’s a fact that many Americans are living longer. The 2010 census found 1.9 million people over age 90, compared with 720,000 in 1980.²  As a result, investors who once planned for a 15- or 20-year retirement may now be looking at 30 years or more. One common investment solution that makes sense for many is to stick with stocks for longer. But Rob Williams, director of income planning at the Schwab Center for Financial Research, cautions against radically reallocating to stocks in retirement. He recommends starting with the more traditional mix of 60% stocks and 40% bonds and cash investments, then adjusting that allocation as necessary based on the age of the younger spouse.

“A financial planner can help you determine the appropriate allocation for your needs,” Rob says. “You might find that a larger stock allocation is appropriate for your circumstances, but it’s best to talk to a professional before you make that leap.”

More important, he says, is to consider moving at least some of your savings into a Roth IRA. Unlike other Individual Retirement Accounts, Roth IRAs are exempt from the required minimum distributions mandated by the IRS beginning at age 70½—so that money can stay invested longer, potentially accruing greater gains for the surviving spouse. (For more on retirement-oriented tax strategies, see “Lowering Your Taxes in Retirement.”)

Pensions

If you participate in a pension, you’ll have to choose a distribution plan when you retire. One of those choices might be what’s called a Joint and Survivor Annuity, which lets you cover a surviving spouse in exchange for a lower monthly benefit. These annuities factor in a spouse’s age, so covering a younger one can take a serious bite out of the elder’s current benefits. That said, this strategy may suit couples who don’t require the full pension benefit to make ends meet in the short term, but rather are primarily concerned with the long-term funding of the younger spouse’s retirement.

Health care

In many couples, the older spouse is often the one with the company-sponsored health insurance plan—and if he or she retires at 65, the couple may lose that coverage. However,  while the elder is eligible for Medicare, the younger is on the hook for her or his own health insurance. “That cost can be significant, especially if the younger spouse won’t be eligible for Medicare for 10 years or more,” Tim says.

In cases like this, he suggests taking full advantage of an HSA. To do so:

• First, purchase a health insurance policy with a high deductible, which can be far less expensive than those that cover every bump and scrape. Generally, the higher the deductible, the lower the premium.
• Second, start contributing up to $3,400 annually for individuals and $6,750 for families to an HSA. If the plan is company-sponsored, you can make before-tax contributions straight from your paycheck; if not, contributions are tax deductible.
• Third, consider investing your HSA funds, just as you would other retirement savings.

“When you pay for medical expenses out of your HSA, you’re using triple-tax-advantaged money,” Tim says, because you got an up-front tax deduction, you pay no tax on the withdrawal, and capital gains and interest are also untaxed.

What’s more, you can pull money out of an HSA for nonmedical spending without penalty beginning at age 65 (though it’s taxed as ordinary income). And if you get saddled with a medical bill for more than you’ve saved, you can make a once-in-a-lifetime transfer from your IRA to your HSA without tax consequences.

Planning

Lastly, it’s imperative that all couples—whether retiring separately or together—begin preparing for retirement at the earliest opportunity. Share with each other your dreams of the ideal retirement—and then consult a financial planner to begin charting out a realistic road map. After all, the sooner you start, the likelier you are to get there.

Your staggered-retirement checklist

Five considerations for spouses retiring at different times.

• Health care: If you’re the younger spouse, consider a triple-tax-advantaged health savings account: contributions are tax-deductible; capital gains, dividends and interest accumulate tax-free; and you pay no tax on withdrawals for approved medical expenses.
• Pensions: Consider a Joint and Survivor Annuity, which allows you to cover a surviving spouse in return for a lower monthly benefit.
• Portfolio allocation: Consider sticking with stocks for longer. It’s best to start with a traditional mix of 60% stocks and 40% bonds and cash, then adjust your allocatioin depending on the age of the younger spouse.
• Roth IRAs: Consider moving at least some savings into a Roth IRA. They’re exempt from IRS-mandated required minimum distributions, so the money can stay invested longer, potentially achieving greater gains for the surviving spouse.
• Social Security: If you’re the older and higher-earning spouse, consider waiting to collect until age 70. That way, you lock in higher payments for both yourself and your surviving partner, who can collect your benefit for life starting at full retirement age (see chart, below).