Deciding who to share your life with is usually based upon factors other than retirement planning. After all, most couples do not begin their relationship by considering strategies for claiming social security or generating income in retirement. As silly as that may sound, there are some important factors that can complicate future financial planning. One complication that is becoming more common are relationships where a significant age gap exists. According to the Pew Research Center, 61 percent of first-time marriages are between individuals with some type of age gap and 5 percent of first marriages and 20 percent of second marriages are between individuals with an age difference of 10 or more years. As the age gap widens, additional financial complexity is introduced and there are more long-term financial considerations to address.
The money must last even longer
Accumulating enough wealth to generate income throughout retirement is no easy task. Now imagine having to accomplish this feat for an extra 10 to 20 years. Remember, the larger the age gap, the longer retirement assets must last and it is important to take steps to help improve the chances the younger spouse will have sufficient assets to carry them throughout retirement. The first step is to have realistic expectations regarding the future financial needs of the couple and the younger spouse (assuming they outlive their partner). Next, it is important to develop a game plan to address the age discrepancy and this may include one or both spouses working longer, increasing the level of risk of the investment portfolio based upon the younger spouse’s time frame or reducing current and or future spending. Having financial clarity on future goals is critical for any couple, especially when planning for the financial strain that can come from a longer retirement time frame.
When to retire?
Another related challenge is how to decide when “life after work” will begin for each spouse. Should the older spouse continuing working until the younger spouse is of retirement age or is it financially feasible for the younger spouse to retire early so they can enjoy retirement at the same time their partner is retiring? Challenges may arise when spouses are at different phases in their life. The fact is, timing the optimal retirement age is one of the most significant financial choices that will be made and it is crucial to understand all the financial and emotional implications before moving forward.
Social Security and health insurance considerations
Optimizing Social Security is generally based upon information none of us know – how long we will live. However, it is important to develop a game plan for social security withdrawals, especially when age disparities exist. It is important to remember the basics of social security – the longer you defer taking Social Security, the larger your payment (or your surviving spouse’s) payment may be. (After reaching normal retirement age, benefits increase by 8 percent per year for each year you defer). For some couples, it may be advantageous for the higher earning and older spouse to defer Social Security in order to maximize the survivor benefit for their younger spouse. Remember, when one spouse passes away, the surviving spouse will retain the larger Social Security payment while the smaller payment ends. Retiring early and beginning Social Security pre-maturely may have the unintended consequence of reducing future benefits – often to the detriment of the younger spouse.
Don’t forget to address the need for health insurance too. While the older spouse may become eligible for Medicare at age 65, the younger spouse may need to continue working or acquire costly individual coverage so be careful not omit these potential expenses from the retirement budget.
Pensions and RMDs
If you are fortunate enough to have access to a pension, choosing the proper survivor option is also critical. While choosing a joint and survivor annuity payment will reduce benefits (often vary from 50 to 100 percent), these survivor options may safeguard the financial needs of the younger spouse and should not be overlooked.
Age discrepancies may also impact the calculation of Required Minimum Distributions from retirement accounts. Keep in mind that if you are married, your spouse is the sole beneficiary and your age disparity is greater than 10 years, RMD amounts will be calculated using the IRS Joint Life and Last Survivor Expectancy Table which allows for smaller distributions than the standard RMD table.
Differences in age may also create an increased need for risk management and life insurance can play an important role. Inadequate financial resources can lead to significant changes in lifestyle including the need for downsizing a home, taking a second job or the postponement of retirement for the surviving spouse. If you have others who rely on you and your income to meet their needs, it may be necessary for an older spouse to maintain coverage longer than they might normally have. Spouses should work together to determine if the goal is for the surviving spouse to remain in their home, pay off liabilities, have sufficient funds for education goals for children (if applicable) and also be able to retire one day.
An age gap may also highlight the importance of developing a long-term care strategy. Without proper coverage, older spouses that end up requiring long term care could prematurely draw down on retirement assets and compromise the retirement goals of the younger spouse. While you must be careful when selecting coverage, having a plan to address the challenges that can arise from a long-term care need should also be reviewed.
Crafting an estate plan can also be a bit more complicated when age gaps exist – especially when there are children from a prior marriage. This may involve the creation of various trusts and the retitling of assets to ensure that both spouses are financially secure while distributing assets as desired.
While addressing the complications that come from age differences in relationships is not always easy, developing strategies that take the needs of both spouses into account can help. Since everyone’s situation is unique, consider speaking to your tax, legal and financial adviser to determine the most appropriate strategy for you.
Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNER & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC