How much money will your clients need in retirement? Seventy to 80 percent of pre-retirement income is an oft-used rule of thumb, with more recommended for retirees who might be globe-trotting, making mortgage payments or putting grandkids through college.
But while simple estimations may play out for individuals, couples have more complex needs. For a healthy couple aged 65 today, there’s nearly a 50/50 chance at least one of them will live to the age of 90. Women also outlive their husbands by five to eight years, face greater healthcare costs and are far more likely to require long-term care.
Typically taking the role of the family caregiver, women also tend to earn less, work fewer years and invest in lower-risk, lower-yield assets than their male counterparts. Ultimately, this leaves a couple with less savings going into retirement.
Fortunately, partners can strategically coordinate investments and distributions, leveraging the money each has made better than either could have done alone.
For several reasons, married women – and men – fare significantly better in retirement. According to the Census Bureau, median 2013 incomes for couples with and without kids were $85,087 and $70,995, respectively. The median income for single women was $26,355.
By splitting household expenses, that difference is magnified, allowing couples to put away even more for retirement. Americans haven’t exactly saved well, but a study by the Employee Benefits Research Institute showed that married couples born between 1965 and 1974 were about $32,000 behind on retirement planning, compared with a shortfall of $75,000 among single women of the same age.
Finally, married women and men tend to be healthier as they age. According to a study by the Center for Retirement Research, singles between the ages of 51 and 61 are more likely to develop serious medical conditions, suffer disabilities and enter nursing homes. Disabilities also reduced net worth by 42 percent for singles – but by only 16 percent for couples.
When to retire
Over one-third of women retire at the same times as their spouses. What’s more, men and women both tend to leave the workforce around age 62, despite earlier planning to retire at 65. It’s tough enough to make a nest egg last an additional three years; it’s even harder to stretch it for six more. Early retirement will also trigger earlier 401(k) distributions, lifetime Social Security penalties or both.
Waiting to retire, on the other hand, gives a couple a more time to build their nest egg, greater Social Security benefits and a smaller window of time to make it all last. While it flies in the face of tradition, it may actually benefit female clients to work longer than their husbands, particularly if they’re a few years younger and in better health. And people who work longer tend to live longer. Plus one spouse retiring at a time can make it easier for a couple to settle into a new routine.
Another advantage of being married: Dual-income couples can strategically invest in their 401(k)s.
“Look at the plan with the highest match so the spouse with the better plan can focus on maxing out that one,” says John Piershale, wealth advisor at Piershale Financial Group. “The other spouse can participate less or not at all, so the couple has more overall cash flow every month.”
That extra cash might be invested in an HSA, brokerage account or other asset that, in combination with the 401(k), provides more retirement income.
The distribution phase
That cash might also be put toward a Roth IRA. “In general, the main thing we look at with drawdown strategies is tax efficiency,” says Brandon Corso, executive director of financial planning for Edelman Financial Services. “Take some from tax-deferred accounts and some from after-tax investments.”
A single retiree or single-income family can use the same strategy, but multiple accounts allow for more options during the distribution phase.
“It all becomes more complex, but more flexible due to different ages and different required minimum distribution dates,” Corso adds.
For instance, a female client’s husband might start drawing down his 401(k) at age 70 ½ (or earlier, in order to reduce overall tax liability). If your client is four years younger than her husband, she’ll have four more years to rely on other assets, saving her own 401(k) for the years she’s likely to live beyond her husband. Because she files taxes jointly with her husband, they can both minimize liability and maximize reward.
Social Security coordination
In addition to retiring early, 83 percent of married women also file for Social Security benefits before their full retirement age – often at the same times as their husbands file. While delaying benefits can net a client a maximum 32 percent lifetime credit, collecting at age 62 reduces benefits by 25 percent.
That’s a tough hit for one spouse to take. If both collect early, they’ll have to draw down their assets that much faster. Fortunately, couples can leverage one another’s benefits to draw income early on while still reaping the benefits of delaying.
“There used to be the file and suspend strategy, but that ended in 2015,” says Piershale. “Couples can still coordinate benefits with the restricted application, but it’s more like file and take.” Most useful for couples in which the main breadwinner is older, the restricted application allows the higher-earning spouse to file for a spousal benefit while their own benefit grows.
“If someone delays Social Security to 70, they’ll need to take more income from their investments up front,” Piershale reminds. That’s a tough pill for many retirees to swallow, but given Social Security’s lifetime payout, it tends to work out better in the long run – particularly for women, who live longer and face greater healthcare and long-term care costs later in life.
Titling and benefits
Finally, couples must make sure their assets are titled in a way that doesn’t harm one party when the other passes away.
“Wives and husbands should both be familiar with the titling on their accounts, and they should make sure there are beneficiaries on all IRAs, pension plans and other assets,” says Piershale.
Under the Employee Retirement Income Security Act of 1974, 401(k)s are automatically passed on to surviving spouses. The same is not true for IRAs, which go through probate if no beneficiary is designated.
Remarriages and blended families can also complicate matter: Pensions earned during a marriage are generally considered joint assets, but state divorce courts ultimately determine their fate. Whether a remarried couple can change anything before they retire or not, it’s important they find out for sure which assets are fully their own, which ones must be shared and which should have their beneficiary designations made concrete.
Ultimately, your married clients’ decisions should be contingent upon their goals.
“Lots of what we do is goal-based planning,” says Corso. “What level of income do you want, when do you want to retire, what do you want to do in retirement and what kinds of colleges do you want to fund for your kids and grandkids?”
Of course, nailing down those goals requires input from both husband and wife, and both should be involved in the plan from the beginning.
“If you’re only gathering information from one of two parties, the other doesn’t really have much say in designing the plan,” Corso adds. “We’ve always felt that if both spouses are actively engaged, the likelihood is both spouses will end up happier with their outcomes.”