Planning your finances is never really simple. But when one spouse is many years younger than the other, there is often even more to consider. For example, instead of planning a typical retirement income stream of 30 years, it’s going to be more like 40, maybe even 50 years. Financial planning when there’s an age difference can be a bit more complicated.
For me and my wife Suzanne, this is that situation. I am currently 68 and she is just 47. To be honest, it didn’t really dawn on me as to what might make it very different when we are 20+ years apart in planning retirement life until just a few years ago. Having met her when I was working and just in my mid 50’s, I thought retirement was far off in the distance and never dreamed that I would “have” to retire early because of my health and that she would become disabled for health reasons too. That’s made me ask the question: “What do we do differently to deal with our finances when one spouse is so much younger than the other?”
First Things First
Since we both effectively stopped working full time almost 10 years ago, we have had to be super resourceful in planning our everyday expenses and seeking as many creative and unusual ways of earning extra money. I have written extensively about our budgeting and side hustles and how it has made us able to not only survive but actually have a life that is fun, fulfilling, and working well. Initially, I wasn’t so sure, but the experience has shown me that the idea of fiscal responsibility, education, and practice works. It’s the main reason I am writing this blog and am hopeful that no matter what the situation is, people of any age and any situation will practice good financial habits and perhaps our experience will guide them.
Planning for Retirement
The most common mistake when a couple’s ages are significant years apart is not being prepared for a very long retirement. It’s natural to want to retire and spend time together when an older spouse retires, but that means the younger spouse (often the woman with a longer life expectancy to begin with) could be living in retirement for 40 or more years. That is a very long time to live just on savings, especially if some of the couple’s wealth is held in reserve for others (like favored charities, children from a prior marriage, etc.). Frequently it’s advised that the older of the two consider working longer; perhaps retiring at 70 instead of 65 in order to better fund the future living expenses of the survivor. That didn’t work so well for us.
In addition, retirement income sources like pensions and annuity payments will be more spread out (the same amount will be paid over a longer time, resulting in lower monthly income) when joint and survivor options are chosen. It’s critical to select payment of these retirement sources over both lives, not just the older one of the couple, in order to maintain the standard of living of the survivor.
Special Rules About RMD’s That You May Never Have Heard About
As you may already know, when you reach the age of 70½, you have to take a Required Minimum Distribution (RMD) from qualified retirement plans. If your spouse is your sole beneficiary and is more than 10 years younger than you, you may use the Joint Life Expectancy Table to calculate your RMD instead of the Uniform Lifetime Table. Using the Joint Life Expectancy Table will result in a smaller RMD than using the Uniform Lifetime Table and stretch you savings further. Of course, it will also reduce your payout each year and that must be workable or other problems will develop.
You will take the ages you and your spouse will be at year’s end when you reach the year that one becomes age 70½ and use the Joint Life Expectancy Table to determine the life expectancy factor. Then you divide that into your previous year-end retirement fund balances and this calculation will give you your RMD amount.
You may only use the Joint Life Expectancy Table if your spouse beneficiary is more than 10 years younger than you. If you have more than one primary beneficiary listed on your IRA, you must use the Uniform Table and not the Joint Life Expectancy Table. Contingent beneficiaries don’t matter. If you have multiple primary beneficiaries, you must use the Uniform Lifetime Table.
Other Things to Know About Your RMD
If you change beneficiaries during the year, you may not use the Joint Life Expectancy Table but you may be able to use the Joint Life Expectancy Table if a trust is the beneficiary of your IRA and your spouse, who is more than 10 years younger than you, is the sole beneficiary of the trust. Certain requirements must be met. Check with your tax advisor to see if your trust qualifies.
Your IRA custodian is not required to report your RMD amount to you using the Joint Life Expectancy Table. The custodian is permitted to use the Uniform Lifetime Table for all reporting of RMDs to IRA owner, so be aware that an amount reported to you may be more than the actual required RMD.
Delaying Social Security is Critical
Most people jump at the opportunity to begin Social Security payments as soon as they are available. However, with a significantly younger spouse who may be receiving survivor benefits for 40 years or more, the longer you can delay taking your Social Security payments, the better off the survivor will be. Waiting until age 70 to start Social Security will significantly increase your joint retirement income and the spouse’s survivor benefits for the rest of your (and your spouse’s) life.
I would have done so if I were still able to work full time outside the home.
Planning Your Kids’ and Grandkids’ Education
With a later marriage sometimes come later education expenses. It wasn’t an issue for us, but it sometimes can be one for others. This often means that instead of building up savings in your late 50’s, you’ve only just started to write the really big checks for your kids. Saving early is an option, but for most people planning to work longer may be much more realistic.
Estate Planning can be Much More Complicated
Estate planning is rarely simple, but when a couple with a significant age difference is planning for the management of their estate, some additional complications can be introduced. For example, there may be children from a prior marriage. Often the parent of these children will want to ensure that their “share” of any inheritance is protected. Frequently, assets accumulated before or even during a second marriage may not pass directly to a survivor, but may have some significant strings attached. With a much older spouse, incapacity planning and the management of retirement accounts also take on greater urgency.
Healthcare Costs are Often Bigger, Sooner, and Longer
When the older spouse turns 65 and starts Medicare, you will be paying out-of-pocket for private supplemental (or advantage) insurance that is generally more expensive than employer-provided benefits. Couples who are of similar age can downsize, move together into retirement communities or assisted living later in life and share some of that cost. This may not be an attractive option for a much younger spouse, so it may mean in-home healthcare may become necessary. Another (more expensive) option is for one spouse to be in a nursing facility while the other maintains the original home. You have to consider all of these alternatives no matter what your current situation is right now. There are never any guarantees when it comes to your health. That’s why planning ahead and being financially responsible is so important.
These are just some of the things you will need to consider when you choose an older (or younger) spouse. There is more here to discuss and in some future post I will do just that. Here’s hoping that you are looking at all of your possible outcomes and circumstances before they arrive at your doorstep.
Are you in a similar situation as my wife and me? Do you have family members or friends who may be? Do you understand RMD’s and how it can affect the distribution of your retirement savings? These and so many other questions may seem like something you can deal with long down the road but the truth is that the sooner you consider them the more peace of mind you can secure. What do you think?