When One Spouse Retires Before the Other: How to Plan
It used to be that most spouses retired at the same time. But for many couples, those days are past. If you and your partner face staggered retirements, you’ll want to tweak some of the retirement rules-of-thumb. Here are five financial areas to re-assess when one spouse retires before the other.
Retirement Lifestyle
Retirement planning is never simple, but it can be more complicated for couples who are retiring separately. If you are the retiring spouse, you might be eager to dive into all the activities you put off until retirement. If you’re the working spouse, you might anticipate that your other half will take up a larger share of household chores or seek a part-time job.
Failing to discuss how you envision this transition can be a recipe for resentment. As early as possible, sit down together to start creating a shared vision. How long does the working spouse have left in their career? How will the retiring spouse fill their days? Are there solo experiences planned? How about shared ones?
You should both have an idea about each other’s retirement expectations. Where you differ, try to find common ground.
Social Security Benefits
While you’re talking, decide when each of you will claim Social Security benefits. If you’re the retiring spouse, you may be tempted to claim your benefits early to replace the income that’s no longer coming in.
You’re eligible to start receiving benefits at age 62, but consider postponing until at least full retirement age—the point you receive your full benefit amount. If you claim before this age, your Social Security will be permanently reduced.
If you’re physically and financially healthy, consider postponing even longer. For each year you wait up to age 70, you increase your Social Security amount.
You especially may want to delay if you earned significantly more than your spouse. If you pass first, your partner may end up receiving more Social Security based on your work history than on theirs.
Retirement Accounts
If you are the working spouse, you might feel tempted to stop contributing to your 401(k) or IRA when your partner retires. With just a single paycheck to rely on, you might feel like you can’t spare the money for your retirement plans.
But the longer you can contribute to your retirement accounts, the better the chances are that you will have enough money to last through both your retirements. For 2021, you can contribute the following amounts:
401(k) plans: Up to $19,500, plus an additional $6,500 if you’re 50 or older
IRAs: Up to $6,000, plus a $1,000 catch-up contribution if you’re 50 or older
You may also be able to fund your spouse’s IRA. This spousal IRA strategy can help increase your retirement savings while you have a regular income. To qualify:
Your income needs to equal or exceed the total IRA contributions made
Your spouse cannot be working and must have little to no income
You must be filing joint tax returns (i.e., married filing jointly)
For 2021, you can contribute a total of $12,000 to both of your IRA accounts, or $14,000 if you are both 50 or older.
Required Minimum Distributions
When you are retiring at different times, you want to be strategic about required minimum distributions (RMDs). If you’re the retired spouse, consider using your RMD to pay for household living expenses. The working spouse can then use their paycheck to contribute to retirement accounts as suggested above.
If you have an age difference, your RMD amount may be reduced. The IRS has a separate RMD calculation for spouses who have age differences that exceed 10 years. Your spouse will need to be the sole beneficiary of your IRA for this calculation to apply.
Investment Portfolios
You’ve probably heard of the investment rule-of-thumb stating that the older you get, the less risk your portfolio should take. If you and your spouse have a significant age difference, you may want to rethink this rule of thumb.
The goal for an investment portfolio is to provide enough money to last the rest of a retiree’s life. But when you have big age differences as a couple, that investment portfolio must last longer.
That means, if you’re the retiring spouse, you may want to have a heavier equity allocation than usual. You might also plan for a lower withdrawal rate.
Your situation is unique. We recommend that you talk with a fiduciary, fee-only financial advisor who will recommend a portfolio strategy based on your family’s financial situation and long-term goals.
Budgets
So now that you have a shared vision for your lifestyles, and you’ve made decisions about Social Security, retirement plan contributions, RMDs, and investment portfolios, it’s time to update your budget.
A budget provides the framework for your spending and saving decisions. And it can help prevent surprises when it comes to retirement income and expenses. We’ve seen many people express shock when they see just how much a single income will affect their finances. A budget can provide a wake-up call—before you overspend.
A budget also allows you to dream. You can adjust the numbers on paper (or virtually) and find savings in surprising areas. Together, you can decide how much fun money to set aside for the newly retired spouse’s enjoyment. (Make sure to earmark some fun funds for the working spouse too!)
If your financial situation is complex or the numbers aren’t working, consider working with a financial advisor. Our fiduciary, fee-only wealth management firm in Roseville and Folsom, California, has helped couples in all kinds of situations—from retiring at the same time to retiring years apart—create a retirement that is sustainable and enjoyable for both spouses.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.