Four Considerations for Your Joint Retirement Plan
On paper, retiring at the same time as your spouse sounds like a no-brainer! If you both retire together, then you would be free to travel the world, take up some new hobbies, and spend more quality time together as a couple. Chances are that you’ve not been able to enjoy these luxuries much over the past 20, 30, or more years. This is because, by the time we are nearing retirement, we have only recently said our goodbyes to our youngest child, and 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. However, it is vital, especially for women, to know where the pitfalls lie.
If you are considering leaving your job in your 50s or early 60s, you are walking away from your peak earning years. This doesn’t just affect your income now; it will also be impacting your earnings for years to come.
This is because cutting your 50s and 60s short will mean that you aren’t contributing as much as you could to Social Security, employer-matched 401(k) plans, 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 essential to run through potential scenarios with your current financial plan and retirement savings to ensure you will be secure for the long term. There are many factors to consider during this review, and we recommend that you work with a financial advisor if you are considering early retirement.
If you conclude that you are unable to retire at the same time as your spouse, try not to get too discouraged. Your plan can still be adjusted to help you achieve financial independence. A few things that your advisor might recommend are:
- Delaying retirement by a few years
- Making catch-up contributions to your IRA and 401(k)
- Converting some IRA money to a Roth IRA
- 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 spend quite a few of their working years raising children and/or caring for other family members, they usually need to make up for the lost time. Staying in the workforce at their peak earning time could make up for years of lower earnings earlier in life.
Since women tend to live longer, retiring earlier and missing out on potentially profitable years to save can significantly impact women—more than one may realize. This is mainly because early retirement means losing out on income now and a higher Social Security payout in the future.
Women, on average, spend more years retired than men do. Women also tend to have more costly health issues later in life and need more expensive long-term care. With a longer life comes the added expense, and if women start with fewer retirement funds, to begin with, the chances 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 can wait to tap into it, the longer it has time to collect compound interest and grow.
If you can wait to claim your Social Security benefits, you will 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.
Since the Social Security benefit is a locked-in, guaranteed payout that will last through your entire life, it works to everyone’s advantage to wait and delay as long as they can to maximize their overall payout. This is especially true if they are relatively healthy and have other assets that they can tap into before using Social Security. Be sure to consult with a trusted advisor to analyze your situation before claiming your Social Security benefits.
Suppose you decide not to retire at the same time as your spouse. In that case, the fact that your household income will go down may present opportunities to convert some of your or your spouse’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 grow tax-free.
For example, if your household taxable income goes down from $171,050 to $71,050 in 2020, you can convert up to $100,000 of your and/or spouse’s IRA to a Roth IRA by staying in the 22% federal marginal tax bracket (if your spouse does not collect 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 72. Allowing Roth IRA money to 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 tempted to make a quick jump into retirement, it is worth remembering that you will be leaving a lot of money on the table now which puts you at risk of outliving your money.
Change of Course
Of course, life has a way of intervening on even the best-laid plans. Even if the plan is to continue working, sometimes the health or caretaking of another family member may precede. This is why it is vitally important that people, especially women, take every opportunity offered to save for their retirement.
The simplest way is to take advantage of any 401(k)-employer match program and roll over any money left in a 401(k) plan at former jobs. You can also downsize living arrangements and make a stricter budget to allot more funds going into savings. On top of that, it is always a good idea to become educated on investing and taking a more active role in household retirement strategy.
Financial Security in Retirement
In a perfect world, everyone would retire with a healthy nest egg that will last them through their lifetime, and Social Security benefits would only function as an added security. This fantasy can be a reality with some advanced planning and budgeting. This might mean retiring at the same time as your spouse, or one spouse continuing to work and save, making the most of that peak earning years.
To truly maximize your retirement strategies, I recommend consulting with a financial advisor who can look at your overall financial picture and guide you along the way. If you are concerned that there’s just too much to know, I invite you to schedule a complimentary 30-minute Discovery Call. My team at Echo Wealth Management and I can help you navigate these waters. Wealth management can be complicated, but it doesn’t have to be. Let’s chat and see how we can be of service to you.