It can be a major adjustment--financial and otherwise--when one spouse retires. Good planning can keep the course corrections to a minimum.
From the early days of their 27-year marriage, Don and Cindy Bianco knew the time would come. Don, who is five years older than his wife, would retire before her. As chief investigator for the Ohio Department of Commerce's Unclaimed Funds Division, he was poised to collect his pension after 30 years, while she continued to work as a nurse at Riverside Methodist Hospital.
Thanks to advance planning, the Columbus couple didn't get caught off-guard when Don's workdays ended. He had spoken with people who had already retired and utilized the state's retirement assistance program. "Don planned well for retirement. With him being older, I knew he would retire before," says Cindy.
The Biancos' situation is an increasingly common one. More and more couples have dual incomes, and one spouse frequently qualifies for an earlier retirement due to either age or an employer's length-of-service requirements. Having one spouse at home and one still in the workforce can allow a couple to ease into both the lifestyle and financial aspects of retirement. Often, it can reveal how well they've planned for the occasion.
Some couples have the financial planning skills to independently gauge their retirement needs, while others seek help from professionals or retired friends and family. Either way, don't wait until the last minute. There's no reason to risk delaying your retirement--or your spouse's--because insufficient savings leave you unable to afford it.
"When it comes to planning, a lot of people don't come to their financial advisor soon enough. You want to go sooner than two years out," says Michelle Merkel, a Certified Financial Planner and owner of Upper Arlington-based Merkel Financial.
Most financial planners advise couples who are developing a retirement strategy to also discuss estate planning and resources for long-term care, should one spouse become ill.
According to the National Retirement Risk Index published by the Center for Retirement Research at Boston College, 51 percent of households are at-risk of not meeting their pre-retirement standard of living even if they annuitize all assets. The risk of a shortfall jumps to 61 percent when including health care and 65 percent when adding long-term care.
Twelve years after Don's retirement, the Biancos' income hasn't changed much. The couple took measures to prevent their income from slipping once he qualified for his pension. Planning early allowed them to align their needs and their income. "That had been our plan all along. Toward that end, we had made financial plans to save for the time when my income would be cut and Cindy continued to work. Her income has increased to the point where we're pretty even to where we were," Don says.
Phil and Elizabeth Schick of Clintonville faced a similar scenario in August 2008, when Phil retired from the Dispatch Printing Company after 42 years. The combination of his pension and Social Security kept the couple's income at roughly the same level, says Phil. "We were cognizant of it. Financially, we were OK," he says.
Elizabeth, an administrative secretary with Columbus City Schools' special education department, plans to retire within a year. Continuing to work after age 60 allowed her to accrue additional savings. When she retires, she'll receive a pension worth almost half her salary. "We know what to expect," she says.
The Schicks' timeline is a pretty close approximation of the typical couple approaching retirement, according to the Center for Retirement Research. It found more than half of married couples retire within two years of each other, but only 20 percent retire within the same year.
Planning for one spouse's retirement can be more complicated for private-sector employees who aren't lucky enough to collect a pension. The recent stock market meltdown derailed retirement plans for many couples expecting to use a 401(k) or a Roth IRA to fund their golden years. Now, some older employees have been forced to extend their retirement timelines. "A few years ago, everyone talked about retiring at 55. Now, that is a frightening prospect," Merkel says.
"A lot of families, after the last 10 years of navigating the investment environment, have some concerns because the growth of their portfolio might not have met their expectations. So some people might backpedal on retirement. Therefore, we're seeing some clients delay their retirement plans," says Jamie Menges, a Certified Financial Planner with Investment Partners Ltd. in Dublin and chairman of the Financial Planning Association of Central Ohio.
Public-sector retirement systems fared better in the Wall Street crisis. "Retirees from the public sector who have a defined benefit plan have not been as adversely affected as those who have defined contribution plans, subject to the movements of the market," Menges says.
When deciding if one spouse can retire, couples should review not just their portfolios, but other assets in combination with debts such as mortgages, car loans and the like.
While there may be a temptation to draw on retirement accounts as soon as a spouse is age-eligible, most financial planners agree a 401(k) or Roth IRA should be the last reservoir tapped. Once those funds are accessed, a lack of other resources could cripple a couple financially. "Even if one spouse retires 15 years before the other, the one who retires sooner should avoid withdrawals if the household can manage without the extra money," says Sherman Hanna, a professor in the consumer science department of Ohio State University's College of Education and Human Ecology.
Social & Financial Security
Collecting Social Security raises a different set of issues. Retirees can draw benefits as early as age 62, as long as they're willing to accept a smaller check if they haven't yet reached full retirement age; that milestone is set by the U.S. Social Security Administration (SSA) based on when a person was born.
Take the case of someone born between 1943 and 1954, whose full retirement age is 66. If that person chooses to collect at age 62, his monthly retirement benefit falls by 25 percent, according to SSA statistics. Those born in 1960 or later (full retirement age: 67), take a 30 percent cut by accepting benefits at 62.
In recent years, the economy and job losses have forced more seniors to apply for their benefits early. From 2008 to 2009, the number of men accepting early Social Security grew from 58 percent to 72 percent, and the number of women who did so rose from 64.2 percent to 74.7 percent, according to the SSA's annual report.
Couples should plan carefully when deciding whether one spouse should accept Social Security at a younger age, when the benefit payout will be less. "When deciding how to apply for Social Security benefits, one must be careful to consider all variables. A misstep here could cost a household considerable retirement income," Menges says.
With retirees living longer, it's more import than ever to ensure they have sufficient savings to last the rest of their lives, Merkel says. Peeling away the salary of the spouse who retires first can be a wakeup call for couples who may not have anticipated the true impact of the income drop.
Spouses often differ in how well they understand their financial position heading into retirement. It's common for one spouse to have little or no connection to their finances, Merkel says. Even with a six-figure income, one spouse may reach retirement only to find that, as a couple, they have nowhere near enough money saved.
"You have to define your own retirement story. People often don't have true comprehension of what they need in retirement. The reality is people spend more," Merkel says. With more free time, opportunities to shop and travel grow, and without a dose of caution, couples can cut into their nest egg.
Any gap between spouses' incomes merits special consideration. If the wife only works part time, but the husband who earns $150,000 retires first, the couple needs to recognize they may have to tap savings and pensions to fill in the missing income in the short term.
Some retirees have been caught off-guard because the generous defined-contribution pensions that were commonplace a generation ago have largely been replaced by cheaper 401(k) plans that put the savings burden on employees. "Companies are terminating pension plans," Merkel says. "People don't realize nobody is taking care of them. They have to take care of themselves now."
Failing to prepare for potential health-care coverage changes could upend a couple's retirement savings, particularly if they're forced to buy pricey private insurance or pay COBRA premiums should something happen to the other spouse's job.
Ideally, a spouse who retires early will be able to secure heath insurance either through his or her former employer or still-working spouse. "Retirement before 65 typically will mean that the retired partner will rely on the working partner's health insurance, if this is feasible," says OSU's Hanna. The worst-case scenario: going a few years without coverage until Medicare kicks in.
"If something happens to the working spouse, what happens to the medical coverage? Every day that concern is delayed is one less day you have to worry about it," Menges says.
Don and Cindy Bianco are fortunate to have state-provided health-care coverage as part of his retirement benefits. Future state employees might not have that luxury. As budgets shrink, more public employee systems have cut retiree health insurance for workers hired after certain dates.
Long-term care insurance is another issue those approaching retirement should address. A serious illness that requires a lengthy hospital stay or nursing home care can have a catastrophic effect on a couple's savings and leave the healthy spouse financially vulnerable.
An American Journal of Medicine study found that medical-related bankruptcies rose 50 percent from 2001 to 2007, when medical bills led to 62.1 percent of all bankruptcies. Health-care insurance is no cure-all: 75 percent of those filing for bankruptcy had such coverage.
Lack of preparedness for illnesses can lead seniors to lose homes, return to work or move in with family members, laying waste to dreams of world travel or other pursuits.
Finally, discussions on estate planning should also precede the first spouse's retirement. Second marriages and blended families, with children from different marriages, can cause legal hassles that end up in probate if wills and trusts aren't drafted or kept up-to-date. If heirs expect to inherit the family house or a monetary sum, the couple must ensure their retirement planning has sufficient funding to meet those obligations, Merkel says.
"We try to make certain that our client's retirement plans are working in concert with their estate plans. Imagine the challenges of a Brady Bunch union and the questions of who is entitled to what. A family like this has to be sure that retirement assets are spent down in an equitable manner consistent with their legacy plans," Menges says.
Human nature also plays a role in retirement decisions. If one spouse continues to work as the other enjoys leisurely days at home or on the golf course, jealousy could result. If the working spouse runs a home business or frequently works from home, the situation could easily be exacerbated. By outlining retirement dates well in advance, couples can avoid stirring up any hurt feelings or bad blood.
The Biancos say such spousal squabbles haven't been an issue for them. "One thing everyone is concerned about is if there will be animosity if one person is working and one isn't. We've had the good fortune to not have any problem with that. Cindy has been supportive of my decision to be retired," Don says.
Bill Melville is a freelance writer.
Reprinted from the March 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.