Retiring at the Same Time as Your Spouse? You Might be Selling Yourself Short…
By Echo Huang, CFA, CFP®, CPA
It sounds great! Retiring with your spouse at the same time would mean you could travel together, take up some hobbies together, have more time to spend as a couple. And how long has it been? Often, by the time we are nearing retirement we have only recently said goodbyes to our youngest child. Which means that over the last 20 or more years, spouses have seen little of each other as day-to-day obligations eat up alone time. It is for these reasons that simultaneous retirement has its appeal. But it is important, especially for women, to know where the pitfalls lie.
If you are considering leaving your job in your 50’s or early 60’s, you are walking away from your peak earning years. That doesn’t just affect your income now, it means that you aren’t contributing as much as you could to Social Security, employer-matched 401(k) plan, and IRAs. These years are critical to safeguarding your finances especially as you move into the later years of retirement. Before you and your spouse decide to exit the workforce together, it will be important to run scenarios with your current financial plan and retirement savings to be sure that you will be secure for the long term. There are a lot of factors to take into consideration during this review and it is recommended that you work with a financial advisor if you are considering early retirement.
If you come to the conclusion that you are unable to retire at exactly the same time as your spouse, try not to get too discouraged. Your plan can be adjusted to help you achieve financial independence. Your advisor may recommend delaying retirement by a few years, making catch-up contributions to your IRA and 401(k), converting some IRA money to a Roth IRA, and restructuring your portfolio for potential growth.
Social Security & Women
Social Security payments are tabulated based on your 35 highest-earning working years. Since women tend to pare back their working years to raise children and/or care for other family members, staying in the workforce at a possible peak earning time could make up for years with lower earnings earlier in life.
Since women tend to live longer, retiring earlier (therefore losing income and a higher Social Security payout) and missing out on potentially profitable years to further save, could have a greater impact on women than one may realize. Women, on average, spend more years retired than men do. That extended life also means that women tend to have more costly health issues later in life and need more expensive long-term care. With longer life, comes the added expense, and if women started with less, to begin with, the odds are higher that they will outlive their savings. Currently, women are 80% more likely than men to be impoverished after the age of 65.
Delay and Save
Whether it is Social Security, your 401(k), your IRA or taxable brokerage accounts, the longer you are able to wait to tap into it, the longer it has time to grow.
If you can wait to claim your Social Security benefits, you will be able to collect more money down the line. If your full retirement age is older than 66 (that is, you were born after 1954), you can still start your retirement benefits at 62 but the reduction in your benefit amount will be greater than 25%, up to a maximum of 30% at age 62 for people born in 1960 or later. Benefits rise roughly 7% a year until they reach a maximum payout at age 70. Because Social Security benefit is a locked-in, guaranteed payout that will last through your entire life, it behooves everyone to wait and delay as long as they can to maximize their overall payout if they are relatively healthy and have other assets to use. Consult a trusted advisor to analyze your situation before claiming your Social Security benefits.
If you decide not to retire at the same time as your husband, your household income will go down that may present opportunities to consider converting some of your or your husband’s IRA or rollover pre-tax 401(k) money to a Roth IRA by paying income taxes at a lower tax rate to have money inside your Roth IRA to grow tax free. For example, your household taxable income goes down from $168,400 to $68,400, you can convert up to $100,000 of your and/or husband’s IRA to Roth IRA by staying at 22% marginal tax bracket if your husband does not collect his Social Security benefits right away. If you do this for a few years before you retire and collect Social Security benefits at age 70 and start taking distributions from your IRA, you will be able to lower your taxable income during retirement years by reducing IRA balances, increasing Roth IRA balances. Lower taxable income means lower Medicare insurance premiums in addition to more tax savings during retirement. Keep in mind that Roth IRAs do not have RMDs (required minimum distributions) at age 70.5. Letting Roth IRA money grow tax-free for a few more years before you need to begin withdrawing from it can add years to your solvency timeline.
So, when you’re considering making your move toward early retirement, you really need to think about whether or not you’re able to leave so much money on the table now and risk outliving your money.
Change of Course
Of course, life has ways of intervening on even the best-laid plans. So even if the plan is to continue working, sometimes health or caretaking of another family member may take precedence. This is why it is vitally important that people, especially women, take every opportunity offered to save for their retirement. The simplest is taking advantage of any 401(k)-employer match program. Rollover any money left in a 401(k) plan at old jobs. Downsize living arrangements and make a stricter budget to allot more funds going into savings. On top of that, getting educated on how to invest and taking a more active role in household retirement savings is very important. Seeking out financial advice may be a good option. Studies have shown women have reported not investing more as their single greatest financial regret.
Financial Security in Retirement
In a perfect world, everyone would retire with a healthy nest egg that will last with them through their lifetime. Their Social Security benefits would only function as an added security. This fantasy can be a reality with some advanced planning and budgeting. Women need to make their retirement a priority and whether that means retiring at the same time as their spouse and having a well-thought-out plan to afford it, or continuing to work after their spouse retires, continuing to save, and maximizing peak earning years will depend on the individuals involved and their various situations.
The hope, in any of the above-mentioned situations, is that women are involved in the planning process with their spouses and that the couple, together, has planned for retirement and made an educated decision regarding the quality of their retirement.