Some of the most important decisions you and your significant other will make involve retirement. When, where and how to retire – and, last but not least, how to pay for it all. Retirement is a major financial and life transition, and the more planning you can do on the front end – well ahead of that last day of work – the better your chances of enjoying a comfortable and fulfilling experience. Here are some key considerations for retiring as a couple.
Timing Your Retirement(s)
While retiring together makes sense for some couples, it doesn't always work, for reasons both financial and emotional. The financial ones are fairly straightforward: If you retire at the same time, the overall household income takes a major hit. You’ve curtailed the chance for additional savings, and you start tapping into your retirement assets sooner. Plus, you could potentially reduce your Social Security benefits (the longer a spouse works and the longer he/she puts off receiving benefits before age 70, the bigger the payouts will be).
Outside of finances, retirement can be emotionally tricky. Losing the sense of identity you developed throughout your career can be tough. And, no matter how much you and your partner love each other, it can be challenging to suddenly be at home together all the time. For some couples, staggering the day they each bid the office goodbye is a better option, since it gives each partner time to adjust to a new lifestyle. (Read more in Retirement: The One Thing Couples Shouldn't Do Together.)
Rules for Pensions
If you or your spouse is fortunate enough to have a defined benefit plan (a pension in which you receive a definite benefit amount when you retire, based on your years of service, salary and age at retirement), you will have to choose between a Single Life benefit or a Joint and Survivor benefit. If you elect the Single Life benefit, your monthly payments will be based on your expected lifetime – and the benefits will stop upon your death. If you choose the Joint and Survivor benefit, your monthly payments are based on your lifetime plus your spouse's lifetime, and your spouse will continue receiving monthly benefits after you pass away.
The Survivor benefit essentially lasts for two lifetimes – yours and your spouse’s – but (not surprisingly) you will receive lower monthly benefits than if you elected Single Life. Say Bob and Sue have a pension from Bob’s employer. If they elect a Single Life benefit, they might receive $1,500 a month in pension benefits; as soon as Bob passes away, the income stops. If, on the other hand, they elect a Joint and Survivor annuity, they might receive only $1,200 a month while Bob is alive, but – and here’s the big difference – Sue will continue to receive $600 a month for the rest of her life once Bob passes away (the amounts for the survivor vary, depending on the pension, but they're usually at least half of the original monthly payout).
Many retirees are tempted to take the Single Life benefit because it provides the higher payout, but keep in mind that benefits stop as soon as the pensioner passes away. Any retiree health benefits included in the pension may stop as well.
Estimates show the divorce rate for first marriages falls somewhere between 40% and 50%. For those who marry a second time, when at least one spouse has been married once before, the divorce rate jumps to between 60% and 67%. For third marriages, when at least one spouse has been married twice before, it spikes to 70% to 73%.
Because remarriages are statistically more likely to end in divorce, and retirees have had time to accumulate significant assets, family law experts recommend having a prenuptial agreement in place to protect retirement savings that may have already been split during a previous divorce (regardless of fault, such assets are likely to be split evenly). In addition, “prenuptial agreements before remarrying are an ideal way to protect the couple’s assets from creditors if either one had prior debt,” says Carlos Dias Jr., wealth manager, Excel Tax & Wealth Group in Lake Mary, Fla.
Along with a prenup, it’s important to maintain an open discussion about your finances as a new couple, including strategies for investments and Social Security benefits, estate planning, taxes and tuition and other expenses for children from a previous marriage. (To learn more, read 5 Things to Consider Before Late-in-Life Marriage.)
Social Security Changes
Speaking of strategies: two common tactics involving Social Security are now no more (read Social Security File and Suspend Claiming Strategy Is Ending: Now What?). In May 2016, following changes brought by the Bipartisan Budget Act of 2015, the “file-and-suspend” strategy, which allowed couples to increase their Social Security benefits by taking advantage of spousal benefits and delayed retirement credits simultaneously, stopped being permitted.
The changes also mean younger couples (anyone born in 1954 or later) are no longer able to use the “restricted application” to collect only a spousal benefit, while letting their own benefits rise by 8% a year for up to four years (until age 70). Now, filing for spousal benefits is deemed by Social Security to trigger your own retirement benefit as well. (Note: this applies only to new applicants; those who have already executed these tactics are “grandfathered” in.)
Even so, there are still ways to enhance your benefits. For example, “you can still enhance your benefits by delaying taking your retirement benefit to age 70 to help maximize the amount of income you will receive from Social Security,” says Mark Hebner, founder and president, Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: the 12-Step Recovery Program for Active Investors.” (See also Social Security ‘Start, Stop, Start’ Strategy Explained.)
The Bottom Line
Because retirement is a such a big step, it pays (both financially and emotionally) to keep an open line of communication with your partner about what each of you hopes to accomplish once it happens.
Keep in mind that any retirement planning is a work in progress. It's impossible to count on a retirement date, for example, since changes in the economy, your company and your health can alter the best-laid plans. Similarly, you can’t predict precisely how many years of retirement you need to prepare for: While statistics can help you guess your life expectancy, you never really know. When you throw your changing needs and interests into that mix of uncertainty, it becomes important to start with as comprehensive a set of plans as possible – while understanding that you'll tweak them along the way, as you enjoy the next chapter of your life story.
“Expenses change in retirement. They can increase or decrease based on your plans and unanticipated situations. Therefore, determining your income streams, your expected expenses and the savings you should set aside are key. Working with an advisor to help you assess different scenarios will be very helpful,” says financial advisor Diane M. Manuel, CRPC®, CFP® of Urban Wealth Management in El Segundo, Calif.