Couples should consider issues such as IRA withdrawals, Social Security payments, and health care costs when planning out retirement dates, and staggering your retirements may benefit you financially — here’s how.
By Peter McDougall
In this age of dual-income families, chances are you and your spouse won’t retire at the same time. You may be different ages, or have different ambitions—or there might be financial reasons for one of you to delay retirement.
Here’s a quick review of some factors that might make it worthwhile for couples to consider two separate retirement dates:
Putting off IRA withdrawals
If your spouse continues to work , he or she can continue to make annual contributions to an IRA (up to $5,000 in 2008). Workers age 50 or older can contribute an additional $1,000 (in 2008) a year to their IRAs in the form of catch-up contributions.
Those extra couple of years can make a big difference in your financial situation when it comes time for you both to start living off of your retirement income.
Meanwhile, the income your spouse earns at work might allow you to delay drawing on your own IRA for a few years—or to keep such withdrawals to the minimum required by law. (Once you turn 70½, you’ll have to take required minimum distributions whether you need the money to live or not.)
The ability to delay your withdrawals could help you to meet your retirement goals . For example, let’s say you’ve managed to save $300,000 in your IRA by the time you retire. If you can leave that money untouched for three years, it will grow to $378,000, assuming you earn an average return of 8% per year.
Delaying Social Security benefits
Social Security benefits may offer another opportunity to increase your retirement income if you and your spouse stagger your retirement dates. If you were born between 1943 and 1954, your full retirement age is 66.
For every year after age 66 that you delay receiving your Social Security retirement benefits, your monthly check goes up 8% until you turn 70; there are no added benefits to waiting after you turn 70. Accepting such a delay might be easier if your spouse continues to work after you retire.
Alternatively, you may be able to take early retirement if your spouse keeps working. The earliest age when you can take your Social Security retirement benefits is 62, but taking it early means permanently forfeiting 25% of your benefits if you were born between 1943 and 1954—it reaches 30% if you were born after 1959. But taking your benefits early may be a good plan if that means that your spouse can delay taking his or her benefits until age 70, if you’re in poor health and/or you have a low life expectancy.
You should also balance the benefit of higher payments against the fact that you will receive fewer payments over your lifetime. The longer you live, the more it makes sense to wait.
You can find out how long you have to live to make the delay worthwhile by using the Social Security Administration’s break-even calculator.
Making the most of pensions
If you and your spouse both have traditional pensions , you may each want to consider opting out of the joint-and-survivor benefit that continues to provide checks to a spouse (typically at about half of the original pension benefit) after the pension holder dies. That might increase your benefit by 10% or so.
You may also consider opting for the higher pension payment if you have other assets, such as investments or life insurance, that could cover the loss of income from your pension when you die.
Minimizing health care costs
Health care costs often increase dramatically in retirement. Medicare kicks in at 65, but it won’t cover all of your costs.
Bear that in mind when you’re deciding when you and your spouse will retire, and take a good look at the coverage your employer provides both before and during retirement. One spouse might decide to stay at work longer in order to hang on to health care coverage for both of you.
Peter McDougall is a freelance writer who lives in Freeport, Maine.