When planning for retirement, it's important that couples think about their future differently from the way single folks do. By making retirement decisions with a joint outcome in mind, money can last longer, and both spouses can look forward to a more secure retirement.
- Married couples should approach retirement planning differently from the way single people do.
- While some situations call for married people to keep retirement assets separate, in most cases, you're better off coordinating your retirement planning efforts with your spouse.
- Married people should consider the life expectancy and Social Security benefits of their partner when planning for retirement.
1. Viewing It as My Money/Your Money
Many couples think in terms of “my money” and “your money." One spouse may invest their retirement money quite conservatively, while the other spouse takes a more aggressive approach. One spouse may contribute the maximum amount to retirement accounts each year, while the other spouse contributes only a small amount.
There are valid situations—such as second or third marriages—where each half of the couple does need to look at their assets as their own, but in general, most couples will be better off taking a household view when planning for retirement.
For example, what if your retirement plan offers low-cost index fund investment choices, and your spouse’s plan offers a great fixed account option? By coordinating efforts as a household you may achieve a better outcome than selecting investment options independently of one another.
2. Not Considering Joint Life Expectancy, Age, and Health Differences
The odds are high that at least one of you will live longer than you may think—and you need to plan for this. Although it can be difficult to have discussions about life expectancy, it is important to do so. If there is a large age gap between the two of you, this must be factored into your distribution plan.
How do age differences affect your planning? One of you may have to begin required minimum distributions from retirement accounts many years before the other. This would naturally lead to a different investment approach in the account that must be used sooner.
If one is younger and more likely to live longer, it may make sense to buy a deferred income annuity for the younger spouse. Ideally, the tax-advantaged nature of this investment is most beneficial outside of a retirement account. However, depending on your mix of assets, it could make sense to purchase one within an IRA.
Health differences also matter, as they affect your need for long-term care, your choice (and cost) of health plans, and the types of activities you engage in during retirement.
3. Selecting a Lump Sum or Single-Life Pension Option
It is hard to turn down a lump sum of money. Many retirees cash in a pension plan, thinking that it will be better for them to have the money available in an account rather than paid out to them as an annuity over their life. This is often not the best decision.
You can calculate the rate of return that you would have to earn on investments to deliver the same income the annuity option offers. In many cases, it would be very difficult for you to achieve an equivalent rate of return.
Be cautious of advisors who tell you they can “do better” than the pension plan.
Choosing a single-life vs. joint-life option is important, too. Here's one example of a big mistake: A man in a second marriage chose a single-life option on his pension, meaning that the benefit stops when he dies. At the same time, he made his wife the beneficiary of his IRAs. He passed away about 18 months into retirement, and his $6,500-per-month pension benefit immediately stopped.
It would have been better for all parties if he had chosen a joint-life option that continued the pension to his current wife and left the IRAs to his adult children from his previous marriage.
4. Ignoring Differences in Financial Knowledge/Experience
It is normal to have one spouse who is the primary decision-maker when it comes to finances. The other spouse is often not comfortable making big money decisions. Maybe they do not feel they have the knowledge or skill set to evaluate investment options or complex financial transactions.
How will the non-decision-making spouse handle things if they lose their partner? Will they be able to manage a large sum of money or know how to select the appropriate person to do so?
Older Americans have become targets. How would your spouse handle a sales call or pressure from someone who may be using scare tactics or “friend” tactics to propose something against their best interest?
Have honest conversations with your spouse about this, and see what steps they would like to take to make sure they are in good hands if this situation occurs.
5. Starting Social Security Without Considering Survivor and Spousal Benefits
Social Security benefits have a built-in form of life insurance for married couples called a "survivor benefit." With a little bit of planning, you can usually get a higher benefit amount from the person who made the most income. That higher benefit amount will continue for the life of the longest-lived spouse.
In many cases, a lower-earning spouse can collect a spousal benefit for a few years while waiting for the higher earner’s benefit amount to begin.
Because of all the choices available, before making a decision, married couples need to look at how their Social Security benefit choice affects the other and how it affects the household as a whole.
It takes communication, but as a team you can achieve a better outcome by planning together.