May 11, 2017

Retirement Planning for Couples with Age Gaps

Couples with large age gaps have special considerations when planning for retirement to make sure their money lasts.
Dawn Doebler, MBA, CPA, CFP®, CDFA®, Senior Wealth Advisor

Ron and Tina are the perfect couple. Finding each other and love again after they both went through divorces seemed too good to be true. Now that he’s 65, he would like to retire and spend more time with her. She’s 55 and concerned that if she retires now, there may not be enough money to last through her retirement years which realistically may be much longer than Ron’s.

Couples with an age gap have special challenges to consider when planning for their retirement. If the gap is 10 or more years, those challenges can have a significant impact on their income and spending in retirement, especially for the younger spouse. Rather than planning for 25 or 30 years in retirement, couples with age gaps should be thinking about planning for 40 or more years. It can be daunting, but planning in advance can help these couples stretch their retirement income to accommodate those extra years.

Maximize retirement income:

Couples like Ron and Tina may need to consider working longer so that they aren’t dipping into retirement savings too early.  If the younger spouse is working, she may need to stay employed or risk losing company health insurance.  Private health insurance costs can top $6,000 a year in premiums for a 55-year-old woman in good health in Maryland. That adds up to $60,000 by the time she is eligible for Medicare at age 65. She also has many years to continue to contribute to retirement accounts like a company 401k or an IRA depending on their level of income.

If Ron stays employed into his 70s, he may be able to continue to contribute to his company 401k and won’t have to take Required Minimum Distributions (RMDs) and pay taxes on those distributions which start at age 70 ½ should he be retired. Keep in mind that he would need to be employed throughout the entire year, own no more than 5% of the company and participate in a plan that allows him to delay RMDs. He would have to take RMDs from other tax-deferred accounts, like IRAs. If his wife is the sole beneficiary of those accounts, then the IRS allows him to take smaller RMDs since his wife is 10 years younger.

They should also consider how their retirement savings are invested. Before our persistently low-interest rate environment of the last 10 years, the general consensus was to reallocate to a lower volatility portfolio comprised of a greater percentage of bonds as you get older. Now, those in their 50s and 60s have had to stay invested in a greater percentage of stocks to reap higher gains. The same is true for our couple. They may have to take on more risk in their portfolio for a longer period of time to allow for enough growth to cover the extended income needs of the younger spouse.

Whether you’re a couple with a large age gap or you’re within a few years of each other, the only way for anyone to know how much money they will need in retirement is to do an analysis that factors in how much you have saved, your spending rate, life expectancy and potential investment returns. Other factors can also have a big impact, like whether you and your spouse have long-term care insurance or will self-insure the costs of care should either of you need more assistance or become incapacitated as you age. Genworth estimates that the median cost in Maryland for long-term care in a nursing home for our 55-year-old woman when she reaches 85 will be $275,000 per year. If these numbers make you gasp (and they should), it’s a good idea to talk to a financial advisor and have them run a stress test that considers many what ifs, like alternate health care scenarios and various rates of return, so that you can be sure that you’ll both have enough income in retirement.

Long-term care insurance can help couples control medical expenses that could potentially deplete retirement savings if the older spouse were to need intensive care. If Ron spent two years in a nursing home starting at age 80, Tina’s retirement savings would be reduced by several hundred-thousand dollars. There’s just no way for her to make up that savings in her 70s.

To begin planning for retirement, use our Her Wealth Pre-Retirement Checklist. This will give you an idea of where you are in the retirement planning process and provides a roadmap to get you where you want to be.

Maximize Social Security benefits:

By now, anyone close to retirement age has heard that taking your Social Security benefits later rather than sooner can substantially increase the total amount of Social Security income you and your spouse receive in retirement. If Ron delays until age 70, his annual benefit will increase by 8% per year for each year he delays past his Full Retirement Age, and Tina will be eligible for a higher surviving spouse benefit in the event of Ron’s death. These metrics could change at any time if Social Security legislation is revised.

Maximize tax-benefits:

Both Roth IRAs and Health Savings Accounts (HSA) have built-in tax saving benefits. Roth IRAs allow you to contribute after-tax dollars even after age 70 ½ as long as you are not over the Adjusted Gross Income (AGI) limits, and any gains in your account can be withdrawn tax-free. They are also exempt from RMDs, so your investments can remain in the Roth IRA and continue to grow providing potentially more money for the younger spouse to live on.

Contributing to a Health Savings Account (HSA) gives you several tax advantages. Company-sponsored HSAs provide for pre-tax contributions. Health care costs including premiums can be paid from the HSA without any tax on the withdrawals, and those over 65 can withdraw money from an HSA for non-medical spending without incurring any penalties. When you consider that capital gains and any interest earned on your savings are also not taxed, an HSA is a great way to minimize your taxable income.

Going into retirement with a solid plan and more certainty that the income needs of both the older and younger spouse will be covered throughout their retirement will make those years even more golden.

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Shawn: Now you hear all kinds of deals about leasing cars, how can you negotiate a better deal if you want to lease?

Nina: Okay, well many people don't realize that they can actually negotiate the sticker price on a leased car in the same way that you would do that if you're buying a car. And since when you lease -- when you're, you know, your lease payments basically cover the depreciation, the difference between the sales price and the residual value. So it's definitely in your best interest to try to reduce that sales price as much as possible because then you'll pay you know, smaller dollars over the life of the lease. Make sure you pay attention to the down payment at the lease signing. And so here's an example, you might see an ad that says you know, lease payment is only 1.99 a month and that sounds like a great deal for thirty six months. The catch is, is that it might require a $3,600 down payment. So, if you amortize the down payment, then actually that 1.99 special, becomes 2.99. So, you really have to kind of look at total costs. 

And then lastly, dealerships use the term, money or lease factor, when they're calculating your financing costs and a lease factor is not the same as an interest rate. So, you have to make sure the dealer converts that lease factor into a comparable interest rate so you know what your financing charges are. 

Shawn: At the end of the day, does one method wind up being more expensive more often than the other, or can we tell that?

Nina: You know what, it really depends on how long, if you're going to hold the car for a long time, you're better off buying. But if you know, and if you're not, if you just really enjoy driving and you want to have a new car, then go ahead and lease. I mean, there's pros and cons to both, to be honest with you, it's not one size fits all.

Shawn: Alright Nina, great. Happy Thanksgiving to you. Alright, Nina Mitchell is with The Colony Group, for more go to wtop.com and search Her Wealth.

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Dawn Doebler, MBA, CPA, CFP®, CDFA®, Senior Wealth Advisor

Dawn’s experience spans more that 25 years providing wealth management, financial planning and corporate finance solutions for clients. As an MBA, CPA, Certified Financial Planner (CFP®), and a Certified Divorce Financial Analyst (CDFA®), she is uniquely qualified to understand the challenges and financial needs of clients from executives to entrepreneurs, as well as single breadwinner parents. Dawn is a weekly contributor to WTOP radio.