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Investing Specialists

Retirement Planning When There's an Age Gap

How one partner's longer life expectancy affects withdrawal rates, asset allocation, Social Security, and more.

Numerous studies have demonstrated that Americans tend to marry people with who are similar to themselves--in terms of socioeconomic backgrounds, educational attainment, and even level of physical attractiveness.

Partners also seek familiarity on the age front: The average age gap between married couples is 2.3 years, according to 2012 U.S. census data. Among opposite-sex couples, about 77% had spouses who were within five years of one another, and 60% of same-sex couples were within five years of one another.

Yet plenty of couples have more significant age gaps. Ten percent of opposite-sex couples in the census survey had an age difference of more than 10 years, for example, and 20% of same-sex couples had age gaps of 10 years or more.

Sizable age gaps can create special challenges from a financial- and retirement-planning standpoint. Couples with big age differences may need to plan for different retirement dates and life expectancies--with related implications for portfolio-withdrawal strategies, asset allocation, and Social Security filing. Long-term care considerations can also take on greater prominence for couples where there’s a big age discrepancy. I featured a couple with a significant age gap in my latest round of Portfolio Makeovers.

If you're part of a couple with a sizable age discrepancy, here are some of the key ways to ensure that you adjust your plan accordingly.

Craft a Retirement Portfolio for the Longest Life Expectancy
At the risk of stating the obvious, couples with big age gaps should craft their plans to accommodate the partner with the longest life expectancy. That means that a 70-year-old husband and a 58-year-old wife should plan for their portfolio to last over the wife's longer time horizon--28 years, on average, and even longer if she has good health and a family history of longevity. (Social Security's Life Expectancy Calculator is a reasonable starting point for your forecasting, but remember that it uses average life expectancies.)

Longer life expectancies and longer portfolio drawdown periods have implications for withdrawal rates, especially if both partners are no longer working. A single 70-year-old male could reasonably withdraw more than 4% of his portfolio initially, for example, because his portfolio will likely only need to last 15 or 20 more years. By contrast, the 58/70 couple will need to be significantly more conservative with their initial withdrawal amount to ensure that their assets last throughout the wife's 30-year (or longer) time horizon.

The varying life expectancies have implications for asset allocation, too, with higher equity allocations needed to support the longer time horizon of the younger spouse. Whereas a single 70-year-old retiree could reasonably hold less than half of his portfolio in stocks, for example, a couple with an age gap planning for a longer, 30-plus-year time horizon needs the growth potential that comes along with an even higher equity position. The moderate version of Morningstar's Lifetime Allocation Indexes for a 58-year-old (someone retiring in 2025), for example, features a nearly 60% equity weighting.

Of course, some major caveats come into play, depending on the couple's situation and preferences. The above scenarios assume that the younger partner has a longer life expectancy, which isn't always the case. It also assumes that the partners are both drawing assets from the same retirement portfolio, but there may be situations where each partner would want to separately manage and draw from their own pools of assets. (This is particularly common if spouses have children from previous marriages.) In a related vein, age-gap couples won't necessarily retire at the same time. If one partner continues to work even as the older partner is already retired, the retired partner may automatically be able to take modest withdrawals from the couple's portfolio because the working partner's income helps meet the household's cash-flow needs. The initial portfolio withdrawals may indeed be lower, but they won't reduce the couple's standard of living.

Use a Light Touch With Required Minimum Distributions
In keeping with the need to take more modest withdrawals outlined above, age-gap couples can take advantage of more generous rules regarding mandatory withdrawals from their IRAs. (Note that "more generous" is in the eye of the beholder, in that the net effect is that you have to take less from your IRAs post age 70 1/2 if your spouse is substantially younger.) If your spouse is your beneficiary on a traditional IRA, 401(k), 403(b), or 457 plans and is also 10 or more years younger than you, you'll be able to follow a separate (and more generous) RMD calculation than is the case for those with beneficiaries of a similar age. That separate calculation is designed to ensure that you don't prematurely drain your account during your own lifetime, leaving your spouse with too little in assets.

It's particularly important to limit distributions from the older spouse's tax-deferred accounts if those assets are the couple's primary portfolio source. If you don't need your RMDs for living expenses, for example, you can reinvest them in a taxable account. If your younger spouse is still earning a paycheck and has enough earned income to cover the contribution amount (or you do), you could even reinvest the RMDs in a Roth IRA.

Converting traditional IRA assets to Roth might also be appropriate for some 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.)

Maximize Lifetime Income Sources
Individuals and couples in all situations should give due consideration to their Social Security filing decisions, but couples with an age gap have particular reason to do so. If the older partner had the higher income over his or her working career, delaying Social Security filing past full retirement age, as late as age 70, may be especially valuable. Not only will that enlarge the higher-earning spouse's benefits during his or her lifetime, but it will also enhance the lifetime benefits for the surviving spouse.

In addition to smart Social Security decision-making, couples interested in further enhancing their portfolios' longevity might consider an annuity to further augment income over the younger spouse's lifetime. Morningstar contributor Mark Miller discusses the pros and cons of immediate and deferred annuities as a means of supplying lifetime income in this article. Such products will tend to be most appropriate for couples without pensions who are seeking an additional baseline of guaranteed income above and beyond what their Social Security benefits supply.

Develop a Long-Term Care Plan
In contrast with single individuals, who can rely on Medicaid to shoulder their long-term care costs if they exhaust their financial resources, paying for long-term care for the older spouse can have disastrous effects for the financial well-being of the younger partner. 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 for Medicaid eligibility 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. Of course, the decision to purchase long-term care insurance isn't an easy one, especially when you consider the premium hikes that purchasers of this insurance have had to endure over the past decade. This article details some key statistics about long-term care needs and insurance products. 

Factor in Estate, Succession Planning
Estate planning is particularly important for age-gap couples. A qualified estate-planning attorney can help you strategize about the best way to protect assets for a younger spouse in situations like the long-term care scenario outlined above. 

Additionally, it's crucial that these couples think through a succession plan for their financial plan, especially if the older partner has been the primary financial decision-maker. Would the younger spouse know how to pick up the plan and run with it? If the answer is "my spouse has no interest," it's crucial to identify a financial advisor to work with your spouse if something should happen to you. (After all, the financially savvy spouse inevitably will do a better job of choosing an advisor than the one who's not interested in financial matters.)

Bring It All Together
Needless to say, couples with an age gap are contending with a lot of moving parts. 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, Social Security benefits, 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.