Retirement planning can be tricky, but it can get even more challenging when one spouse retires before the other. If you and your partner face staggered retirements, here are six financial tips to help you create a retirement that you both can enjoy for years to come.
1. Update Your Budget
Many people have the notion that couples retire at the same time, but fewer than 20% of couples step into this new life chapter together. Retiring separately can have benefits. Among them, you’ll still have a paycheck for income, and you can continue contributing to retirement accounts.
But you face disadvantages too. If you are the nonworking spouse, you may want to dive into the hobbies and other experiences you’ve been waiting for retirement to start. But those activities cost money, which can conflict with the limits of your single-income household.
A budget can help you enjoy retirement and avoid overspending. Together, you can decide how much to apportion to “nonessential” spending (i.e., all those hobbies!) so the retiree can enjoy retirement. (It’s a good idea for the working spouse to have a set amount of free money to spend as well.)
2. Take a Look at Social Security
Your planning should encompass Social Security, including when each of you will claim benefits. Our Plantation, FL fiduciary financial planning firm generally recommends that couples postpone claiming Social Security.
This is especially true if you are the higher wage earner. If you pass before your spouse, the survivor benefit based on your work record may end up being more than the benefit based on their record.
You can claim Social Security at age 62, but you will not receive your full benefit amount. Your full amount will come when you reach “full retirement age,” which is generally between 66 and 67, depending on your birth year.
However, for each year up to age 70 that you postpone Social Security benefits, you increase your monthly check. Since Social Security is a significant retirement income source, consider whether the working spouse’s salary plus any other income sources can provide enough income to allow the retired spouse to delay claiming.
3. Contribute to Your Retirement Accounts
If you are the working partner, continue contributing toward your retirement savings accounts. You may feel tempted to stop since you are now on a single income, but the more money you can save, the better for you and your spouse.
Count these contributions as one of your budget nonessentials and make the deduction automatic if possible.
You may be able to contribute toward your retired spouse’s IRA. Called a spousal IRA, this strategy enables you to fund both your and your spouse’s IRA. The requirements include:
You must file a joint tax return to qualify.
The working spouse’s income needs to equal or exceed the total IRA contributions made.
For 2021, you can contribute $12,000 combined, or $14,000 if you are both 50-plus. Just make sure you understand the IRA income and deduction limitations.
4. Be Strategic About RMDs
When you reach age 72, you need to start required minimum distributions (RMDs). You might consider using the retired spouse’s RMD to pay for living expenses. That could free up the working spouse’s salary so that they can contribute toward their retirement accounts.
If you have an age difference that exceeds 10 years, you could end up withdrawing less in RMDs. The IRS has a separate table (Table II—Joint Life and Survivor Expectancy) for such cases. The younger spouse will need to be your IRA’s sole beneficiary.
5. Reassess Your Investment Risk
This strategy especially applies to couples with significant age differences. If that’s you, the usual rule of thumb of moving toward a more conservative investment portfolio when you retire may not work.
Your goal is to have enough of a nest egg for both of you to retire comfortably. That means the older partner may want to keep a portfolio with more exposure to equities than is normally recommended for someone their age. You may also need to count on a lower withdrawal rate for your retirement accounts.
Your situation is unique. Consider talking with a fiduciary financial advisor who can help you determine the optimal portfolio allocation and withdrawal rate.
6. Talk It Out
Communication is perhaps the most important step for couples with different retirement dates. You both want to be on the same page about what retirement looks like individually and as a couple.
Where do you want to live? Will you downsize? Will you travel? What will your day-to-day lives look like as individuals? As a couple?
Your retirement years should be a time you both enjoy, but the steps are not always clear if you lack comprehensive financial expertise. A financial advisor can help you understand your options and create a detailed retirement plan you both feel confident about.
Schedule a complimentary consultation with one of our fee-only financial planners 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.