Ep # 70: Who Knew Your Spouse's Age Could Complicate Retirement Planning?

Benjamin Haas | Mar 22, 2022

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Benjamin Haas 00:03
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Hey Adam. Happy St. Patty's Day to you! How are you doing today?

Adam Werner 00:31
I'm doing great. Happy St. Patty's Day to you. If you're watching on YouTube, pretend we're holding pints of Guinness.

Benjamin Haas 00:39
Yes. Irish, it was a podcast day every day.

Adam Werner 00:43
Wow. Wow. Starting off strong.

Benjamin Haas 00:48
Alright, let's just move into the material then.

Adam Werner 00:50
Let's jump in. Yeah, I was not expecting this level of puns to start. So, we talked about this one obviously, in preparation for our recording today. Kind of with the baseline of we often say, it depends. It's all situational when it comes to certain planning ideas and topics and strategies. So, we kind of took that to an extra degree here, where a client's situation, the specific case of there being a larger age disparity between spouses and how that simple variable can really have a big domino effect on all of the other decisions, usually surrounding retirement and I guess, some of those special considerations that are specific to that situation now.

Benjamin Haas 01:44
Yeah. Gosh, so much goes through your mind because when we think about financial planning of the job that you and I and the team has here on giving advice, we really are doing our best to make reasonable assumptions about the future. And, if one of the biggest concerns around retirement is, do I have enough money or will I have enough money? You think about how different that may feel if the money needs to last even longer because you've got, we'll just say the husband who's 10 years older than the wife, that money needs to last 10 years longer in that specific situation. So when it comes to these irrevocable decisions and I guess we should probably just go through them, but Social Security, pension, how you invest, what do you do with an estate plan, we'll go through these. The sensitivity is just so much more pronounced when you have this age disparity.

Adam Werner 02:42
Yeah, and on that note, our planning software defaults to age 95 and that's what we kind of use as our life expectancy in our baseline. So in that scenario, you have again, we said husband, more commonly than uncommonly, right, it's usually the male that is the older spouse but in a scenario where the male, the older spouse would like to retire at 65 and the other spouse is, let's say 55, that 10 year difference. That may mean to go to age 95, that would be 30 years, in our standard plan, which feels like quite a long period of time, to your point, tack an extra 10 years on top of that and now you're looking at 40 years where there may not be earned income coming into the fold now, really stress testing, is this pool of assets that I've saved up to this point are going to last my lifetime and maybe a little bit longer for my spouse. It creates, again, that domino effect of all of these other things that we want to make sure can check those boxes that we can say, yes, this is going to work and you know, go forward with it.

Benjamin Haas 03:50
Right? Because if the one spouse that is passing away, you can make an argument that okay, some of those expenses are going to go away with that passing, but the bills on your house and the utilities and the things that you're paying for anyway, those don't go away. I think we'll highlight this in a second how that income is generated and if you're really relying on Social Security or pension or things that may not keep up over time, that longer time period now for the surviving spouse may present an additional drag on assets. So I mean, I'm getting ahead of myself. I don't know where you want to start as far as digesting some of those variables but I think we're making the point already that there's some sensitivities here. If you're in this situation, talk to a planner. Let's work through this and make sure that you're really going about it in a thoughtful manner.

Adam Werner 04:44
Yeah, I think that is the key, right? In all of these things that we're going to talk about there really is some sensitivity to those decisions and making sure you're getting it right on the front end, especially if by our assumptions, there's going to be a pretty long runway for things to move in a million different directions once you make that decision. You touched on it, was one of the things I wanted to talk about is having a good idea or at least making some pretty good guesses on expenses and spending early on in retirement and trying to project that out. We see that in our planning process where we are looking at 25,30, 35 plus years in retirement, the expenses matter because we're inflating those over time. And everybody loves to talk about, maybe they don't love to talk about it but inflation is a pretty big, hot topic right now so think about that. 40 years from now, what are things going to cost and making sure that we've factored that into the planning, it's an important piece to make sure that you've at least thought through on the front end before making any sort of your revocable decision, especially when it comes to your retirement on the front end.

Benjamin Haas 05:56
So then, let me kind of throw you the softball here. The reason I think we're focusing on retirement is many of those key inputs on retirement are age based. Social Security, age based. Medicare, age based. Sometimes when you can get your pension, age based. How you're paying taxes or when you're having to pay taxes on retirement money, age based. So let me just toss it to you. Which one of those do you want to hit on first because I think if we can talk about them through that lens and age disparity, we can maybe give some pointers of the things we would want people to think about.

Adam Werner 06:31
I think the simplest right off the bat is the health insurance side of things right and talked about that is age based, I think most people know that. Age 65 is when you are eligible for Medicare. So again, running this scenario where the older spouse may now be eligible for Medicare and that may alleviate some of the stress of okay, well, how am I going to pay for coverage? What kind of coverage am I going to get? That's all well and good but now potentially, if the younger spouse is also trying to retire at the same time and is no longer employed, doesn't have access to health coverage. How do we cover that gap? What could be, I mean, it could be any number of years but in our scenario, at least 10 years of trying to apply our private health insurance, which we know is not inexpensive. How do we factor that into the planning process and making sure that that is something covered?

Benjamin Haas 07:19
Yeah, because you certainly, as you I think alluded to earlier, you don't want to understate your expenses in retirement when you're trying to illustrate that and health care, deductibles, premiums, whatever it's going to take to cover those things. When you talk about inflation, those costs have typically gone up more than just your typical other standard living expenses so you really, really want to plan accordingly for that. I think Social Security falls into that camp to where the earnings history of each spouse is really important and typically how many years you have in. Social Security being the highest 35 years, even though there are spousal benefits, age bends, things of that nature are going to play a role here.

Adam Werner 08:10
So we I feel like we've done one specifically on Social Security so may we talk about bits and pieces of this, but it is important to understand the dynamic of that spousal benefit, in that younger spouse or I guess, at this point, age may not be the deciding factor. It's who is the higher earning spouse, right, and the other spouse can collect up to 50% of the higher earners benefit. The key point there being that is still at the younger spouse's full retirement age.

Benjamin Haas 08:43
Yeah, bingo.

Adam Werner 08:45
That part, I think, we find often is not understood by most people. So, you know, I can collect 50% of my spouse's benefit when we go to retire but that's at for most people nowadays, that's going to be age 67, not 62, which is the earliest you can claim and that five years may have a pretty big impact from an income standpoint on filling that gap. So you can collect it as early as 62 but then you take more of a haircut, it's as low as 35% of your spouse's benefit.

Benjamin Haas 09:16
Well, I think part of our job, too, is to be forward looking and I know you said we can run plans till age 95 and that's kind of the default. Certainly, nobody knows when they're going to pass away but usually people have a feeling on like their sense of longevity, either based on family history or their own health. The reality is when you have spouse, one of them passes away, that surviving spouse only gets to keep one of those benefits and it's the higher of the two so in a situation where the older spouse was the higher earner, that's the bigger benefit. We want to be really thoughtful about when they take it, knowing that you really want to maximize that not just for yourself but for your surviving spouse if your life expectancy is 10 years less than theirs.

Adam Werner 10:03
Yeah, that's where you start to get into that strategizing of, okay, what, in that scenario, right, that means we'll probably want to try to delay that older spouse from them starting their benefit as long as financially possible to lock in that potentially higher amount. Again, assuming that they pass away prior to the other, the younger spouse, they can now collect 100% of that benefit for their lifetime and the nice thing about Social Security is it does get cost of living adjustments over time, unlike many other sources of fixed income. Historically, that has not kept up with inflation and even this year, with Social Security getting close to 6% bump but inflation's going to get 7 to 8%, for the beginning of the year here. Again, we're not quite necessarily keeping up with that pace so getting that decision on Social Security right, really can have long range impacts in terms of the benefits that totally can come out of the Social Security Plan, I guess I should say. Over, again, that really long 30, 40 plus year potential window.

Benjamin Haas 11:12
And I guess, I think of pension benefits being kind of similar to that. When you go about making those decisions on not only when you're going to start it but usually there's some sort of survivorship option there. When you're thinking about a spouse that's 10 years younger, the reality is, most pensions do not have that cost-of-living adjustment. So, when you pass away, great, that something might be left behind but if it's truly not going to keep up with expenses, that needs to be considered in planning. And maybe that's why I mean, I don't want to make a hard pivot here but maybe that's why the sensitivity to what do you have in savings? What are those assets? How are they invested? Should also include - am I going to need some life insurance in this situation because we're going to need to backfill those last couple years. It probably is more sensitive in this planning scenario of age disparity than it would be if you have two 65-year-old individuals retiring at same time.

Adam Werner 12:10
Yeah, I mean, we often see depending on the level of assets, and again, I got in my head, the scenario I'm running is two identical spouses 65 years old, right, they have accumulated assets, they probably don't have a whole lot of debt, if any, at that point and then life insurance often becomes a choice. It's not necessarily needed at that point in time but in this scenario, where there is a potential for this money to last even longer, having that lump sum that at some point in the future, when that older spouse passes away, it can immediately create liquidity in that scenario without necessarily having to worry about what is the market doing? What are we withdrawing from these accounts. All of those different factors, it really can be that failsafe that can trigger at some point in the future when that passing happens. Again, just to create that liquidity to create a few extra years of income, to take some of that stress off of the long term projections.

Benjamin Haas 13:17
So my mind then goes, when you think about life insurance, a lot of that is just that longevity planning and then estate planning. If I can make, hopefully, that's a more seamless transition into that part of the conversation then hard right turn. But we often say that the onus really is and the stress and pressure really is, on the second spouse when it comes to estate planning because the rules of the engagement here are pretty nice when the first one passes away that the other spouse can really just own everything, pick everything up. There isn't a lot of the pitfalls in that situation but as soon as that second spouse passes away, now things really need to kick into gear for children, heirs. And I just think it would be really important when you think of that second spouse having a longer runway without their deceased spouse to have really clear understanding and documentation of how they would have wanted things to go.

Adam Werner 14:21
Yeah, and so that's the key and was one of the things that I wanted to note too. With any estate planning, right, the first step is just to clearly communicate intentions. Let's put it all out on the table, figure out if something happens to me, what would I want to see happen and vice versa for your spouse, right? If something happened, what would they want to see happen? Let's document that and then let's try to figure out how do we need to structure things so that can actually occur? And we talked about in this situation too when you have these situations where potentially an older spouse or you know that age disparity, sometimes we see that because of second relationships, right? Either divorce, remarriage, and that creates its own set of potential hurdles if there were children from a previous relationship.

Benjamin Haas 15:11
Yeah, that's a whole other 20-minute podcast.

Adam Werner 15:14
Yeah, the rabbit hole we could fall down there. Yeah, it's pretty deep the amount of assumptions and variables and things that you would want to consider as part of that estate planning process. I'm thinking, putting my myself in that situation, whereas I was the older spouse, I remarried. Sorry, Amy.

Benjamin Haas 15:35
Purely hypothetical,

Adam Werner 15:37
Right, purely hypothetical. You would theoretically want to take care of your spouse first but it would need to be clear that when you pass away, I want this money to flow back to my kids and their families to take care of them. That would be my intention. Not everybody's going to follow that line of thinking but I think that's more often than not kind of the default. But that is not the default when it comes to estate documents and wills and things of that nature. It can get messy pretty quickly.

Benjamin Haas 16:08
And in that case, maybe even a trust, right and that's where the higher level of planning needs to occur and conversations need to occur. I didn't mean to interrupt. I'm really glad you brought that up.

Adam Werner 16:18
No, no, no, that was it. Yeah, it can get messy pretty quickly.

Benjamin Haas 16:22
Well, and then one more domino there because even before, if we're going to stay in the lane of like remarriage, which I think you're really smart to bring that up when we we’re thinking of age disparity. Yeah, I would equate that more to some of the situations, client situations we have where remarriage has occurred. Part of the conversations even before estate planning then are, what does that mean for retirement timeframe? What if the younger spouse is still paying for kids and their education? What of this is your responsibility versus my responsibility? There's just a whole different level of financial planning and good communication that needs to occur between the two of them and that's really where we need to play an active role. I think it shrinks the margin for error and maybe that's a good way to summarize this. You're dealing with this type of variable, that longevity is a wonderful thing but it can kill a lot of plans if you really did not work on proper assumptions on the front end.

Adam Werner 17:27
Yes, well said.

Benjamin Haas 17:29
Well, then we'll leave it at that. Perfect. You find yourself in that situation. Give us a call. This is I think, as you kind of said at the beginning, this is one of those situations where it takes what sometimes feels like pretty standard advice and really flips it upside down.

Adam Werner 17:49
Yes, agreed.

Benjamin Haas 17:53
All right. Great job. Thank you, have some green beer and bangers and mash today.

Adam Werner 18:01
I don't think bangers and mash is Irish, is it? Isn't that more British?

Benjamin Haas 18:06
I was thinking more pubby. I don't know. You tell me. Now I sound ignorant.

Adam Werner 18:12
Have some scrapple.

Benjamin Haas 18:14
Okay. Sounds good. That I will.

Adam Werner 18:17
Bye.

Benjamin Haas 18:28
Thanks everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended for specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

Investment advice offered through Great Valley Advisor Group, a registered investment advisor.

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Ep # 70: Who Knew Your Spouse's Age Could Complicate Retirement Planning?