Planning Problems (or Opportunities) for Age Gap Couples
They say that, “love knows no age,” which is particularly true when you consider the number of couples with big age differences who are tying the knot these days. When age 50 is the new 30 and age 70 is the new 50, people can reach further up and down the age spectrum to find their match. While that may create more opportunities for love, age-gap couples face a number of potential problems when planning their financial future. However, with foresight and proper planning, couples could turn some of those potential problems into opportunities. The key is to look far out ahead and get your planning done well in advance.
Planning for Retirement
The most obvious potential problem for age gap couples is planning for a longer retirement period. With life expectancy stretching out 30 years or more, couples could be looking at having to create lifetime income for 40 years or more. The first consideration is how your retirement savings are invested. Most couples might get by with a more conservative mix of 40 percent stocks and 60 percent bonds and cash investments. For couples with a longer retirement time horizon, it may be necessary to stay with a more aggressive mix of 60 percent stocks and 40 percent bonds and cash investments.
Another consideration is whether to keep your retirement assets in a traditional IRA or 401(k) plan, or convert them to a ROTH IRA. If you keep your money in an IRA or 401(k), you assets will be subject to the required minimum distribution (RMD) rule. The RMD rule mandates that by age 70 ½ you begin minimum withdrawals based on IRS mortality tables. That could force you to draw down your savings at a faster rate than is safe for your projected lifetime income needs. Roth IRAs are exempt from RMD, so your assets can stay invested longer.
Deciding when to start collecting Social Security benefits is typically based on factors such as an individual’s health, family health history and income needs in retirement. Individuals who don’t see themselves living a long life might consider taking benefits when they are eligible – age 62 for reduced benefits or full retirement age (65 to 67 depending on birth year) for full retirement benefits. Individuals who expect to live a longer life span could benefit from a larger monthly benefit by postponing payments until age 70. In cases where the older spouse is also the higher earner, an age gap couple could benefit by postponing benefits to age 70. Not only would it lock in a higher monthly benefit for the older spouse, it would lock in a higher survivor benefit for the younger spouse who could be expected to live after their spouses passing.
If the older spouse is the one with an employer-sponsored health insurance plan, it could create a major gap in coverage for the younger spouse when the older spouse becomes eligible for Medicare. The younger spouse would need to purchase individual health insurance, which could be very expensive. A less expensive and more flexible alternative would be to establish a Health Savings Account (HSA). That would require the purchase of a high deductible insurance plan, which is far less expensive than a full coverage plan.
At this point, you can make an annual, tax-deductible contribution into your HSA. In 2018, the maximum contribution is $3,450 for individuals or $6,900 for families. If you’re 55 or older you can increase your contribution by $1,000. This not only allows you to take advantage of a tremendous savings opportunity, it can offer more flexibility in your health care choices. The money can be withdrawn tax-free to pay for any eligible medical expense. Beginning at age 65, when you become eligible for Medicare, you can use the money in your HSA for nonmedical spending, at which point it is taxed as ordinary income, just like an IRA.
The need for long-term care is an important planning issue for any couple entering retirement. But, when one of the spouses is significantly older, it is almost an imperative. According to recent studies, 52 percent of people turning 65 will have a need for long-term care in the lifetime.1 With the average cost of a nursing home topping $82,000 it can be financially devastating, especially for a healthier younger spouse who can be expected to live many more years.2
The financial risk is greatest for couples with assets of $250,000 to $2 million because, while they might be able to afford the steep cost of long-term care, it would decimate their savings. They couldn’t qualify for Medicaid until they spent down most of their assets.
One solution is to purchase long-term care insurance, which can cover the cost of home care as well as assisted living or nursing home stays. The time to buy long-term care insurance is when the older spouse is between the ages of 55 and 65, when it is more affordable. Waiting much longer than that, could make the insurance coverage prohibitively expensive.
The rising cost of retirement due to expanding life spans makes planning for a secure financial future more important than ever. When a couple’s life span increases further due to an age gap, the need to bridge that gap with greater financial security becomes paramount. Planning early enough, with the guidance of financial advisor, can turn age gap pitfalls into opportunities.
1National Association of Insurance Commissioners (NAIC). The State of Long-Term Care Today. May 2016. http://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
2Genworth Financial Inc. website. Compare Long-Term Care Costs. https://www.genworth.com/about-us/industry-expertise/cost-of-care.html