One of the biggest challenges facing retiring couples is what to do about their age difference when it comes to Social Security and healthcare decisions. Many people are aware of some, or the most of the financial ramifications, but few understand the personal impact as well.
I recently met with a couple who had an age gap of roughly four years. They plan to retire in two years when he will be 66 and she will be 62. Typically speaking, the notion that retirement is just around the corner gives many people a warm and fuzzy feeling… like the long journey is almost over. However, for this couple, and those like them, it’s a situation that could cost than more than $100,000.
As you might expect, when I revealed those numbers, their retirement decision rose to a whole new level of complication. I explained that her health insurance costs from age 62 to 65 could run close to $500 a month, or $6,000 a year. Conservatively, that equates to an estimate of $24,000 during that four-year gap. Throw in the fact that taking Social Security at 62 may cut her long-term benefits by 30% or more and the harsh numbers add up quickly. In this case, her benefits at age 62 would be $500 less per month than those at her normal retirement age (NRA) of 66. Extend that over 15 years to her general life expectancy of age 87 and you get a net loss of $90,000. Combined with health insurance costs, that’s close to $115,000.
These conversations are never easy and jaw-dropping numbers like these leave some couples wondering if a few extra retirement years are really worth it. Is spending an extra two, three or four years together worth $100,000? What factors should couples consider and how can they balance the personal and financial aspects?
The reality of Social Security benefits is that no advisor or investment can promise a return equal to the amount delaying retirement payments ensures. Someone earning a 30%+ return while waiting for the NRA is a scenario that makes every investor salivate. Even delaying retirement by a single year may earn someone upwards of a 10% rate of return on future dollars received.
Additionally, working one or more years would likely help offset health insurance premiums, which, based on the numbers above, could defer $6,000 in costs … a nearly 6% return simply by investing time.
But it’s not just a financial decision. I wish I could tell you that people never die, become critically ill, or find themselves limited in some mental or physical capacity just one, two, or three years into retirement, but it happen all the time. It’s another difficult conversation to have, and one most people would like to avoid, but it's something couples have to consider as they weigh the financial costs with the personal trade-offs.
All of this makes it more important than ever for people to think outside the box as they prepare for retirement, particularly when there is an age difference between spouses. Here are four things to consider.
Redirect Savings To A Roth or HSA
As people close in on retirement, they often have enough money saved in a traditional IRA or company retirement plan to maintain their standard of living. However, if they withdraw these funds to help cover health insurance costs, they may have to pay taxes on withdrawals. Therefore, one strategy to consider in the final years leading up to retirement is to shift savings from a 401(k) or other qualified plan to a Health Savings Account (HSA) or to a Roth IRA. In some cases, both may provide a tax-free withdrawal benefit, which can help cover healthcare costs without increasing your tax burden.
Work Part-time
Surprisingly, there are a number of companies who offer health insurance and other benefits to part-time employees. While the number of companies offering this benefit is dwindling due to changes brought on by the Affordable Care Act, this is a viable option that allows couples to phase into full retirement. Furthermore, if the idea of spending every waking moment with your spouse would challenge your sanity, a part-time gig with a flexible schedule can help couples balance time together and apart. Important note: The younger spouse is not necessarily the one who has to work part-time. These funding gaps should be considered a shared responsibility not a competition between who’s older or who’s been working longer.
Start A Business
Much of this age difference dilemma is about offsetting or deferring costs while enjoying life together. That can make turning a passion or hobby into a business that generates retirement income a very practical option. My free guide (which you can download below) points out the benefits of starting a business in retirement. Done properly, it can provide cash flow while also helping people replace their work identity, stay connected, and remain mentally and physically fit.
Analyze Health And Health History
We all know that you can pick your friends, but you can’t pick your family. This means you can’t avoid your family’s medical history and conditions passed on from their genes. Whether its high blood pressure, cholesterol, heart conditions, cancer, weight, alcoholism, diabetes or something else, if you’re currently dealing with one or more health issues - and family health history is working against you - the option to retire early may become more important. People are living longer but that doesn’t mean those extra years are healthier ones.
Whatever your decision may be, it’s important for couples to be aware of both the personal and financial costs as well as benefits to retiring at the same time. By stepping outside the traditional confines of retirement planning, couples with a small or larger age gap can redirect savings, seek part-time work, start a business together, and use a health analysis to help balance the personal and financial factors.
