Couples' Financial Planning: What to Do When There's an Age Gap

As nice as it can be to simplify and streamline, financial planning for married couples can get a little hairy. Yes, two people often bring more assets to the table than singles do, which is a plus. But couples' investment portfolios inevitably have more moving parts than is the case for single investors: With multiple IRAs, 401(k)s, and so forth, it can be difficult to skinny down the portfolio to a manageable group of holdings. Other aspects of financial planning, such as developing a Social Security strategy, also get more complicated for couples than for singles. There are personal preferences and attitudes in the mix, too. For example, one partner might have a higher tolerance for risk than the other, or parents might differ on topics such as whether to earmark assets for their kids to inherit.

Yet another wrinkle for married couples? When the two spouses have a big age gap between them--say seven to 10 years or more. Assuming both partners are healthy and in the same age band, they can plan for a similar time horizon, and their anticipated retirement dates are also more likely to be in the same ballpark. But when one partner is substantially older than the other, that brings in a new set of considerations relating not just to the investment portfolio but to other aspects of the couple's financial life, including estate planning and health care.

If you and your spouse have a big age gap, here are some tips to keep on your radar. Also, please feel free to share your own planning tips in the comments field at the bottom of the article.

Allocate Assets for Both Time Horizons
At first blush, the investment prescription for two partners of varying ages might seem simple: Because the younger partner has a longer time horizon, the couple needs more in stocks than they would if they were both the age of the older spouse. Assuming he or she has a longer life expectancy, the younger partner needs more growth potential than the older spouse, and he or she also has time to ride out periodic market downturns. If the two partners have combined assets, that portfolio should be calibrated to last throughout the younger spouse's life expectancy.

Yet that doesn't mean the couple can run with an equity-heavy portfolio and ignore the needs of the older spouse. The older spouse might have an earlier retirement date than the younger one, for example, and he or she will also have an earlier deadline to begin taking required minimum distributions from traditional IRAs and 401(k)s. To facilitate those distributions, the portfolio will also need to include a healthy balance of short-term assets such as cash and bonds.

In such situations, projecting cash flows in retirement on a year-by-year basis is a useful exercise. That way, the planning process can incorporate separate retirement dates, RMDs, and life expectancies; the couple can see how much and where they're drawing assets for living expenses from at each life stage. Armed with that information, they can then allocate the various asset components of the portfolio in a way that incorporates each partner's time horizon. This article discusses sequencing withdrawals from in-retirement portfolios in order to reduce the long-term drag of tax costs.     

Mind Those IRAs
Seniors are required to begin taking distributions from traditional IRAs (as well as traditional 401(k)s, 403(b)s, and 457 plans) once they reach age 70 1/2. But don't just reach for a one-size-fits-all calculator to determine how much you need to take out. If your spouse is your beneficiary on one of these types of accounts and is also 10 or more years younger than you, you'll need to follow a separate (and more generous) RMD schedule than is the case for those with beneficiaries of a similar age. The goal of the separate calculation schedule is to ensure that the IRA owner doesn't deplete the account prematurely because the younger spouse/beneficiary could be around many years later.

Moreover, if your aim is to ensure your portfolio's longevity for a younger spouse, it's worth bearing in mind that you don't need to spend those RMDs if you don't need the money for living expenses. You could invest RMD proceeds in a taxable account or, if either of one of you has enough earned income to equal the contribution amount, plow the RMDs into a Roth IRA. Roth IRA conversions might also be appropriate for duel-age couples; if a spouse's beneficiary has a long time horizon, that improves the likelihood that the long-term tax benefits will offset the taxes paid upon conversion. (As always, it's a good idea to check with a tax professional for guidance before converting.)

Prioritize Long-Term Care and Life Insurance
An extended stay in a long-term care setting won't typically create as many complications for single people as it will for couples: Under a worst-case scenario in which single people exhaust their assets to pay for long-term care, they would then be eligible for Medicaid, provided they met the criteria established by their states. But paying for long-term care can have a ruinous effect on couples' finances, especially if one partner remains healthy and the other is not. In order for the sick partner to be eligible for Medicaid to cover long-term care costs, the couple will need to have exhausted most of their financial resources, leaving little behind for the healthier spouse. (The specifics depend on the state in which you live; healthy spouses are usually able to hang on to their primary residences as well as a fairly small pool of investment assets.)

The risks of such a scenario are compounded for two spouses with a big age gap because the healthy spouse could need living expenses for many more years after the financial assets have been exhausted following long-term care costs. That makes long-term care insurance an even more valuable part of the financial plan than is the case for similar-age couples. Such products can be prohibitively expensive if purchased later in life, and the past few years have brought horror stories of insurers jacking up premiums or reducing coverage for seniors; the current interest-rate environment also makes long-term care policies costly at this juncture. This article details some of the key considerations to bear in mind before purchasing long-term care insurance.

Life insurance will also tend to be even more important in situations where one spouse is older than the other, especially if the older spouse is the higher earner and/or the couple has minor children or children who aren't yet through college.

Tackle Estate Planning
Paying attention to estate planning is important in many situations and life stages, but particularly so for couples of varying ages. An estate-planning attorney might be able to help strategize about how to protect assets for the younger spouse in situations such as that with long-term care, for example, and will also be knowledgeable about how to take maximum advantage of wrappers such as IRAs and trusts to limit the impact of taxes on the total portfolio during both spouses' lifetimes. 

If one or both of the spouses is divorced and has children from a prior marriage, the estate-planning attorney also can help ensure that any financial assets are passed on in accordance with your wishes. For example, a so-called Qualified Terminable Interest Property, or QTIP, trust provides income for the second spouse during his or her lifetime but also ensures that the assets ultimately pass to the deceased person's children or grandchildren (or any other person or entity). 

Navigate the Social Security Maze
Social Security planning gets complicated for couples, with benefit maximization depending on the spouses' ages as well as their work histories. One commonly cited piece of advice is that the higher-earning spouse should defer receipt of benefits until age 70, if possible, particularly for people who have longevity on their side. That's because the benefits increase in each year you wait past your full retirement age. Assuming the higher-earning spouse is also the older one, the pluses of deferring receipt of benefits can really add up because the surviving spouse might be receiving a benefit based on the older spouse's work history for many years. 

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