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AARP Article

Retirement Planning and the Younger Spouse

Adjust savings and withdrawals with the age gap in mind

Retirement planning advice for married couples tends to assume two things: You’re pretty close to each other in age (with the husband perhaps a year or two older), and the husband has always been the primary breadwinner. But in this age of late marriages, divorce and second marriages, what if there’s a much younger spouse? Large age gaps between spouses require planning.

I asked several personal-finance advisers what their advice would be. Here are their thoughts.

Expect to work longer

You may have to stay employed past the typical retirement age in order to build up a larger pot of savings. If, for example, your spouse is 55 and you die, your nest egg may have to fund your spouse for 40 years. For investment growth, allocate a higher percentage of your financial assets to stocks. If that makes you nervous, you’ll have to plan on a lower level of spending — which is the hardest thing for clients to understand, says Alex Feick of Paragon Capital Management in Denver.

Plan to spend less

If you are a typical retired couple, you can afford to spend 4 percent of your savings in the first year and give yourself a raise for inflation in each subsequent year. But with a much younger spouse, you should drop your withdrawal rate to perhaps 3 percent, says Aaron Parrish of Triad Financial Advisors in Greensboro, N.C.

Reduce withdrawals

At 70½, you have to start taking money out of an individual retirement account. If your spouse is more than 10 years younger, you can reduce the required withdrawals — and stretch your savings — by using the IRS’s joint life expectancy table to calculate the amounts.

Mind the insurance gap

If the older spouse carries the couple’s health insurance and switches to Medicare at 65, the younger spouse will need to buy an individual health policy. Currently, it’s an uncertain market, with premiums going up.

Adjust your Social Security

Spouses with big age differences should generally approach Social Security as if they were single, says Bill Reichenstein of SocialSecuritySolutions.com, a website that helps you maximize your benefits. If you have health issues and don’t expect a long life, take Social Security at 62. Otherwise, wait until 70.

Consider life insurance

If you haven’t saved enough, look into a 20-year term life insurance to cover your spouse’s future needs. You can get it even at 65, if your health is good. Check the rates at term4sale.com.

Plan your pension

If you’ll get a company pension, don’t take the lump sum payment when you retire unless your spouse is already well provided for. Instead, take the maximum joint and survivor option. It will pay your surviving spouse 100 percent of your pension for life.

The younger spouse might find his or her career interrupted and savings slashed due to the needs of an aging spouse for medical and personal care, warns Susan Pack of Pomeroy Financial Planning in Cincinnati. It’s something to account for in your financial planning — and all the more reason to manage your spending and save the max.

(Originally published in The AARP Monthly Bulletin.)

AARP Article

How to Maximize Social Security Survivor Benefits

Thousands of widows and widowers leave money on the table each year

Here’s news: More than 11,000 widows and widowers who are now on Social Security could have had higher benefits if someone had bothered to tell them about their claiming options. That unhappy fact comes from the Social Security Administration’s Office of the Inspector General. It highlights how little people know about survivor benefits and what the choices are. Here are some tips:

Who gets survivor benefits?

They’re paid to the spouse of a worker who dies. You have to have been married for at least nine months, although there are exceptions — for example, if your spouse died in an accident. Qualified children get benefits, too, as do ex-spouses if the marriage lasted at least 10 years.

What does the benefit pay? 

You get 100 percent of what your late spouse was receiving, provided that you file at your own full retirement age — 66 or 67. (Note that the survivor’s retirement age can be up to four months earlier than the age required for full retirement benefits.) Payments can start at age 60 (50 if you’re disabled), but filing before your full retirement age reduces your check. If your spouse dies before claiming benefits, your payments are calculated as if he or she had reached full retirement age, plus any deferred retirement credits. 

If you have a retirement benefit based on your own work, can you take a survivors benefit, too?

Here’s where many people miss out. You can’t take both benefits at the same time. But you can raise your lifetime income by taking them serially — something that your Social Security rep might not explain. If your future retirement benefit at 70 will be greater than your full survivor benefit, and you expect to have a normal life span, take the survivors benefit right away, says Bill Reichenstein of SocialSecuritySolutions.com. Switch to your own retirement benefit at age 70, when it will have had years to grow. Conversely, if your retirement benefit at 70 is the smaller one, take that benefit right away; switch to survivors benefits once you reach full retirement age. (Unlike retirement benefits, survivors benefits do not grow after you reach that milestone.) Very important: To use either switching strategy, you must restrict your initial application to the one benefit you want to start with. Otherwise, you may be considered as having applied for both retirement and survivor benefits at once and won’t be able to switch. 

What if you’ve been married twice? 

You generally collect on the account of your second spouse. If you remarried after you turned 60, you can collect on the account of the spouse with the higher benefit.

How do you collect? 

Notify Social Security as soon as your spouse dies. Benefits generally start from the time you apply, not the time your spouse died. If you’re currently collecting spousal benefits on a retired worker’s account and they’re low, you’ll probably be switched to the higher benefit automatically. But if you have a retirement benefit of your own, visit a Social Security office to sort out your options. 

Why is timing so important? 

Imagine Martha, turning 62, widow of George, who died at 63 without ever claiming Social Security benefits. Assume their benefits due at full retirement age (67) would be:

• Martha: $1,800/month
• George: $2,000/month 

Scenario 1: 

Martha files for retirement and survivors benefits at age 62.

Total benefits over 20 years:

$382,100

Scenario 2:

Martha files for survivors benefits at 62, then retirement benefits at 70.

Total benefits over 20 years:

$474,200

Difference: 

$92,100

Source: SocialSecuritySolutions.com

(Originally published in The AARP Monthly Bulletin.)

AARP Article

The Second-Marriage Dilemma

Estate planning can be tricky for couples who have former spouses

Inheritance questions tend to be easy when you’ve been married only once. If you die first, your assets—whatever they are—usually go to your spouse. If you have children, you divide the money among them equally. Unequal inheritance sometimes makes sense. For example, you’d leave more to a child who’s disabled. But for the sake of future family harmony, equal amounts work best.

If you enter into a second marriage, however, the choices get harder—especially if you remarry later in life. How much, if anything, do you want to leave to your new spouse? If you own the house, does he or she stay in residence if you die first? In long second marriages, do you leave anything to stepchildren?

If you avoid making these kinds of decisions, state and federal laws decide where your money goes. Your second spouse typically will be able to claim one-third to one-half of the assets covered by your will, even if it says something else. Joint bank or brokerage accounts held with a child will go to that child. Your IRA will go to whomever you’ve named on the IRA’s beneficiary form, leaving your new spouse out.

If you want some other arrangement, you and your spouse must have a written prenuptial (or postnuptial) agreement that meets your state’s inheritance laws. You’ll also need to change those beneficiary forms.

Overwhelmingly, the spouse with more assets wants to make sure that the second spouse is provided for, says attorney Shirley Whitenack of Schenck, Price, Smith & King in Florham Park, N.J. That might mean leaving him or her with money that otherwise would have gone to your kids.

Where assets are roughly equal, however, or in a late-life marriage, spouses might choose to put their own kids first and leave little or nothing to their new mate.

Complications arise when you own a house. You might leave it to your kids but give your spouse the right to occupy it for life. In some states, the spouse’s right is guaranteed, even if he or she remarries, says attorney Molly Abshire of Wright Abshire in Houston. Before the house can be sold, your new spouse and kids will have to come to some kind of agreement (usually financial).

A risk that might not occur to you is the potential cost of long-term care. In many states, married people have a legal duty to support each other. If your second spouse eventually needs long-term care, his or her assets and yours might be tapped to pay the bills. In Texas, that even includes your own income and IRA, Abshire says. You’ll be spending your kids’ inheritance on your second spouse’s medical expenses.

In other states, however, your personal income and IRA might not be forfeited for a spouse’s nursing home expenses. So get good legal advice. You might decide to skip the “I do’s” and publicly become partners instead.

These decisions can be tough to make, especially if you and your new beloved find that you don’t agree. It’s even harder to tell the kids that their inheritance might change. “Often, people freeze and do nothing,” Whitenack says. Or they make their plans secretly, figuring “I’ll be dead and won’t have to worry about it.” That’s the worst outcome. Be brave. Fess up. 

(Originally published in The AARP Monthly Bulletin.)

AARP Article

How to Financially Protect Your Spouse

When faced with decisions about pension benefits, shortsighted choices now can cause harm in the future

I had lunch recently with a friend whose husband, a teacher, retired five years ago. “We made a big mistake with his company pension,” she told me. “We took the wrong one.”

Pensions come in two versions — a larger check that covers only the lifetime of the person who earned it, and a smaller check that also covers the lifetime of his or her spouse. They chose the larger check to give themselves more money to spend. Now, they both wish they’d taken the version that covered her, too. The prospect of losing his pension income if he dies first has left her a little scared.

Unfortunately, that’s a common story — and not only for pension decisions. Caring partners each want the other to be financially protected, if left alone. But sometimes they make shortsighted choices or accidentally cut a spouse out of money that he or she needs by failing to submit the right paperwork. Here are four things couples should think about that can save a spouse from financial harm:

Leave a larger income

When will you start taking Social Security? A relative of mine, who retired (with pension) at 60 and now has a different and well-paying job, intended to take his Social Security at 62. When I heard that, I yelped. His wife has savings and a pension of her own, and they don’t need extra money now. If he waits until 66 to collect, his Social Security check will be 33 percent larger (plus inflation adjustments) than if he starts at 62. It will be a fat 76 percent higher if he waits until 70.

Money Matters

It’s common to say, “I’ll take Social Security at 62 so that, if I die early, I won’t have lost income that I should have had.” That could be a two-way mistake. First, if you’re healthy, you’ll probably live longer than you expect. By waiting to file for Social Security, you’re storing up extra income for your retirement’s later years. Second, married people shouldn’t think only of their incomes today. If the husband, say, was the main breadwinner, the longer he waits before collecting, the larger the income he’ll leave to his surviving spouse, if he dies first.

Check your individual retirement account beneficiary

Whoever you name on your IRA’s beneficiary form will get the money, whether it’s fair or not. Say that you divorced and remarried, named your new spouse as your heir in your will, but forgot to take your ex’s name off the IRA form. Your ex will get the money, even if the divorce decree said otherwise. You should clean up all your beneficiary forms when you divorce or marry, to avoid accidentally disinheriting a spouse.

Have the power of “I do”

Who will inherit the savings in your 401(k) or similar plans? Here, spouses have super-protection. When you marry, your spouse is entitled to every penny in your 401(k), from the moment you both say “I do.” That’s federal law. The beneficiary form is irrelevant, and so is your will. If you want a different outcome — for example, to leave part or all of your 401(k) to children of a previous marriage — you can ask your spouse to waive his or her rights. The waiver has to be in writing, notarized or witnessed by a plan representative, and filed with your plan.

This can’t be done in advance of the wedding — only a spouse can waive these rights. If you have a prenuptial agreement, it should include a promise to sign. And get thee to a notary right after the honeymoon or even before. In my personal case, there was a notary at the ceremony. My lovely husband signed even before the music struck up.

Guarantee lifetime benefits from a variable annuity

These annuities combine an investment with a guaranteed lifetime income. But the income normally lasts only for the buyer’s lifetime and ends if he or she dies. Any spousal benefits might cover only the annuity’s current investment value or a death payout, says annuity expert Kevin Loffredi, a vice president of investment research firm Morningstar. If you want the annuity to cover both lives, you generally have to pay more or accept a lower income guarantee. Couples often don’t realize that their annuity cuts out the survivor, says Mark Cortazzo of annuityreview.com, which evaluates variable annuities. Some salespeople also have no idea. If you venture into one of these complex contracts, think “spouse first.”

(Originally published in The AARP Monthly Bulletin.)

AARP Article

Divorce after 50 Will Cost You Money

As gray divorce surges, more 50+ people prepare for a leaner life

Families and friends are often shocked when long marriages — including long, bad marriages — fall apart. You endured each other for 30, even 50, years, so why give up now?

I’d say it’s for all the reasons that younger people divorce. The partners bore each other, harbor grudges, seek a different kind of life or fall in love with someone else. Being surprised at gray divorce strikes me as a form of ageism — as if one or the other of a couple (perhaps both) are somehow too old for disappointment, folly or hope.

Whatever the reason, older couples are definitely doing it. The divorce rate among people 50 and older doubled between 1990 and 2010, at a time when the rate for the general population was pretty flat. As an age group, they accounted for roughly 25 percent of all 2010 divorces, according to a study by Susan Brown and I-Fen Lin of the National Center for Family & Marriage Research at Bowling Green State University in Ohio.

A greater willingness to end unhappy marriages suggests that older couples today have more financial resources to fall back on. People usually have to see a way forward financially, no matter how slim, before splitting up. Women, in particular, are more apt to have paychecks and 401(k)s.

How the property is divided depends on state law and your personal negotiation. The starting place, after long marriages, is half the money for each. You can roll your share of your ex’s individual retirement account into an IRA of your own, tax-free. The same is true of a 401(k) or similar plan. If there’s a traditional pension, you can choose a lump sum or a portion of each monthly lifetime payment when your ex retires. Attorney Maria Cognetti, president of the American Academy of Matrimonial Lawyers with a practice in Camp Hill, Pa., advises dependent spouses to take the monthly payments if they don’t know much about investing. The lump sum might not last as long as they thought.

If the amount of property is modest, dependent spouses, usually wives, will probably get alimony. Cognetti advises women to try to settle their claim in negotiation, even if it’s for a little less money than they want. That provides certainty. You don’t know what a judge will decide in court.

When estimating your budget as a single person, take a deep dive into your Social Security options. If the marriage lasted at least 10 years, you can collect on your ex’s account. Spousal benefits can be claimed as early as age 62, provided that your ex has filed for benefits, too. If not, you can claim if your spouse is eligible for benefits and you’ve been divorced for at least two years, says Robin Brewton of SocialSecuritySolutions.com. Note that filing at 62 locks you into a lower check. You’d do better by waiting until your full retirement age, probably 66. If your ex dies, you can collect survivor’s benefits.

However you slice it, life will likely be financially leaner for you both. That’s divorce’s bottom line — at any age.

(Originally published in The AARP Monthly Bulletin.)