Retirement Planning for Couples with Big Age Differences

Even if couples are just three years apart in age, when the older spouse retires, they have to think about how to replace lost income, because most of the time it goes down, says Howard Hook, a certified financial planner (CFP) with EKS Associates in Princeton, New Jersey.

However, May-December couples—a popular term for those more than 10 years apart in age—have a much longer period to plan for, he tells PLANADVISER, not only because the time between their retirement dates is much longer, but because they must base much of their planning on the life expectancy of the younger spouse.

“The considerations are something that shouldn’t creep up on anyone; they should think about it from the beginning, and lay out a longer term plan to ultimately deal with issues down the road,” Hook says. “People tend to want to bite off whole thing in one chunk, but that’s overwhelming and they could shut down.” He suggests these couples think about what’s going to happen in the next 10 years, then worry about the 10 years after that, not worry about what’s going to happen 25 years down the road.

He adds that May-December couples should make sure the younger spouse is comfortable with handling money and informed about all finances long before the older spouse retires.

EKS uses a variation of a bucket strategy, called cash ladders. It helps clients set up a bond or cash ladder of the next three to five years’ cash needs, and replenish the cash or bond ladder with other assets after that time. According to Hook, the advantage is clients never have to sell in a declining stock market.

But, Hook says, people can also set up different buckets for different anticipated needs, such as a bucket investing for growth to take care of young children’s college expenses at a later time. He notes that this may be a more difficult thing to do for those with less assets; they will need to decide what they are funding first, and hopefully they’ve planned for this in advance of the older spouse retiring.

The immediate issues when the older spouse retires are income replacement and benefits, Hook says. The younger spouse and children may have had health insurance and other benefits coverage under the older spouses’ coverage. This will need to change.

Before the older spouse retires, a trend analysis should be done to show if assets will peak too early and when the couple is projected to run out of money. “That will let you know what to start doing now to prevent those things from happening,” Hook says. It can tell whether the older spouse should delay Social Security or take it earlier. He notes that some clients go ahead and take Social Security at full retirement age to allow investment accounts not to be withdrawn so soon and allow them a longer time to grow.

May-December couples will need to decide if the 4% withdrawal rate rule is appropriate or if they should take less to account for a longer planning period. Tax issues should be a consideration when withdrawing from accounts; couples can’t pull from a younger spouse’s accounts without penalty. Those accounts should continue to grow tax-deferred; avoiding taxes preserves more income for the family.

According to Hook, a mistake EKS sees people make is thinking of income as how much stocks are paying in dividends and bonds paying in interest. Currently we are in a low rate environment, so if stocks and bonds are each paying 2%, clients may think that’s all they can take. But, he says if couples consider all assets together and use a cash ladder, they will always have the withdrawal rate they want to take out; it depends on their ages and how they allocate their investments.

Couples should also keep in mind the expense ratios they are paying on investments; it is crucially important to save on expenses to have more income.

One thing that will help, according to Daniel D’Ordine, a certified financial planner (CFP) with DDO Advisory Services, LLC, in New York City, is that these couples don’t have to follow standard required minimum distribution (RMD) tables. The Internal Revenue Service (IRS) lets them take smaller annual distributions because of the younger spouse. The couple has to let the IRS know.

“The extension of that is, while the older spouse is still working, he or she should put as much money as possible into a retirement plan. When they take an RMD, they will save on taxes and have more left over for the younger spouse,” he tells PLANADVISER.

Another way to boost income when the older spouse retires is pension maximization, D’Ordine says. If the older spouse has a defined benefit pension plan, when distributions start he or she is given different options: one is single life annuity taken without regard to the age of the spouse and gives the highest payout, another option is a joint and survivor (J&S) annuity that pays a lower monthly amount as long as the pension holder is alive and keeps paying the surviving spouse when the pensioner dies.

Pension maximization means taking the single life annuity. The older spouse can use the higher payout to buy a life insurance policy on his or her life, so that when the pension holder dies the life insurance pays out tax-free money to the surviving spouse, presumably at an amount more favorable and higher than the J&S option.

D’Ordine warns there are lots of variables, though. Is the older spouse insurable and can he or she get a life insurance policy in the first place? And what is the cost of life insurance? It can be costly, so one must be sure the extra money received from the pension supplies enough insurance. A break even calculation should be done to see when this makes sense.

Another strategy is for the older spouse to defer Social Security payments. This can provide a higher payout for the older spouse, and the surviving spouse can get a survivor’s benefit until he or she is eligible for Social Security—a break even for those years the older spouse was not receiving anything.

At some point, the younger spouse may need to take care of the older spouse, and he or she may be taking care of children at the same time, Hook notes. The best scenario is that couples would buy some long-term care insurance ahead of time, but a lot of times people don’t do that and this can be another crunch on cash flow, he warns.

Retirement planning for May-December couples may not only affect their immediate family. Older spouses may have children—even grown children—with prior spouses.

“Accidental disinheritance” is what D’Ordine calls it when an older spouse that is divorced or widowed with grown children remarries a significantly younger new spouse and changes his or her beneficiary designations and wills to give everything to the new spouse. The new spouse may not make any accommodations for children from previous relationships, so the older spouse may accidentally not give anything to them.

Even if the older spouse makes his or her older children secondary beneficiaries, the children still may not see any money if they die before the new spouse dies. “This is tragic if this is accidental and not intentional,” D’Ordine says.

Individuals should sit down with an adviser or estate planning attorney to make accommodations for older children as well as the new spouse or children, he suggests. For example, they can divide up assets 40/60, or use life insurance estate equalization, taking out a policy that leaves a lump-sum for older children and the rest to the new spouse.

D’Ordine observes that there’s a real do-it-yourself crowd out there, but using a financial adviser or estate planning attorney can really help individuals make the right decisions.