When you hear retirement, many people think about it in terms of turning 65, applying for Medicare and Social Security, and traveling with your spouse using the money you worked hard to save throughout your whole career. But what does that look like with couples with an age disparity? This article will discuss some considerations around retirement planning with an age disparity.
Planning Social Security
Social Security was originally created as insurance against living too long, it is not intended to fully replace working income in retirement years. However, it can make up a significant chunk of overall retirement income.
Social Security eligibility requires at least 40 quarters (10 years) of earned income and Social Security taxes being paid on that income. Your earliest eligible age is 62, full retirement is age 67, and late retirement is age 70. In the time between age 62 and 70, benefits increase by 8% per year. If people plan on living past 80 and can handle delaying Social Security, waiting can vastly improve income expectations in retirement.
Getting On The Same Page: Staggered Retirement Considerations
I’m in a relationship with an 8-year age disparity myself and I come across many couples with significant age differences. When it comes to retirement, it’s important to get on the same page early. Retirement is a team sport, so treat it as such.
Often, when I go through cash flow planning with couples, I find that the younger of the two might have sufficient income to support both spouses when the older of the two retires, allowing retirement assets to continue to grow and for deferment of Social Security until the maximum amount available at 70. However, I’ve also found that in practice, the older spouse may end up not wanting to rely on the younger one for financial support. I’ve even seen it go so far as the retired spouse skipping a vacation because he felt he couldn’t afford it, even though all the household expenses plus a surplus are being met by the working spouse.
It’s important to get on the same page and ask the following questions:
If we retire at different times, are you, the younger person in the couple, comfortable financially supporting the older person in the couple in the initial retirement years?
Are you, the older person in the couple, comfortable having the younger one financially supports you or will it cause you to lead a less full life?
Have we considered our individual income needs and cash flow sources throughout all of retirement?
Do we have sufficient assets to support income needs regardless of the income disparity in early retirement years?
Planning For Retirement At the Same Time
If my partner decided to retire at 67, I would be 59 at the time. I won’t be eligible for my own Social Security at the time, and I won’t qualify for Medicare until I’m 65 so my healthcare costs could be extreme without an employer supplementing insurance costs. Here are my options if I want to fully retire at the same time as my partner:
If married, I could draw on his Social Security benefit (if he opts to take it) while continuing to accumulate my own.
If I saved in a Health Savings Account during my working years, I could leverage that to pay for healthcare costs tax-free.
If I saved in a Roth account, I could pull principal from that tax-free prior to age 59 1/2.
If I have non-retirement investments, I could start to unwind those to pay for my increased expenses over the next six years.
If I have cash value accumulated in life insurance, I can access that before age 50 1/2.
Here is something I shouldn’t do at age 59:
Take money out of pre-tax investments. This will incur state and federal income taxes plus a 10% IRS penalty.
Health Savings Accounts (HSAs)
HSAs are available to people enrolled in high-deductible health insurance plans. You can set aside pre-tax dollars to be used tax-free for medical expenses. HSAs also allow you to invest once you hit certain minimums, allowing you to grow your tax-free dollars. Since healthcare costs can increase significantly in retirement, this can be an essential tool for managing those costs without age restrictions.
Roth Savings
With Roth tax treatment, money goes in after taxes, accumulates tax-deferred, and is distributed tax-free after the age of 59 1/2 . Since the principal investment (what you put in) was after-tax, taking out the principal can be tax-free prior to age 59 1/2 . Roth savings can be achieved through a Roth IRA, a Roth 401(k), or a backdoor Roth. Direct contributions to a Roth IRA have income restrictions whereas the last two do not. Consult a financial and tax professional to discuss optimization of your asset location planning.
Non-Retirement Assets
Non-retirement assets include everything that is subject to capital gains tax, such as stocks, bonds, mutual funds, exchange traded funds, businesses, or real estate holdings. Since they don’t come with the tax advantages of retirement accounts, they also don’t come with age restrictions around distributions so they can be pulled prior to age 59 1/2 without penalties.
Life Insurance
The primary function of life insurance is to provide a death benefit but if you have a permanent policy, the cash value of the insurance can be accessed tax-free for any purpose at any age. There just needs to still be enough left in the policy to pay for internal costs. Consult your insurance agent to help do this correctly and remember that loans and withdrawals reduce the permanent life insurance policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, matures, is surrendered, or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values.
Conclusion
Retirement planning for couples with an age disparity can add complications to what can already be a complex milestone to plan for. Planning for Social Security, communicating expectations, maximizing your asset location strategy, and enlisting the support of professionals can smooth out this process.
