Financial Planning for Retired Couples: Be on the Same Page
Half of boomers don’t discuss their retirement plans according to Fidelity Investments. Discussing your lifestyle preferences is important, but what is often neglected is how your financial situation will be impacted by the choices you make.
It’s easy to overlook or even ignore some aspects of your financial planning but it’s essential that you and your partner are on the same page not only with household finances but the choices you make with retirement income and savings.
Talk, talk, talk
Spouses often assume that they both see retirement the same way, but that’s not necessarily so. When you start talking you might be surprised – pleasantly or otherwise – by what the other thinks.
It’s time for lists. Each of you should write down the things that are the most important to your personal happiness. Then talk about them. Some couples have never had an in-depth conversation about what they want or what their expectations are. You need to understand each other’s goals, needs, expectations and fears.
Couples need to get on the same page and make retirement and spending decisions together.
Are you retiring at the same time?
Many couples think they’ll retire at the same time. They’ve experienced many life events together and retirement is just another one. But it’s not uncommon to see one partner retire before the other.
One of you may envision retiring as soon as possible while the other is perfectly happy at their job. A wife at home might think her husband should work a few years longer so they can accumulate more savings.
How will that affect your plans?
Should I stay or should I go?
Couples may have different ideas about where to live after retirement.
One of you may dream of living permanently at the family cottage while your spouse wants to move closer to the children and grandchildren.
You may decide to stay in your family home. If so, will you need to renovate or add age-friendly features?
If you downsize to a condo will you want to stay in the same area, move to a warmer place, or live near the ocean? Own or rent?
Your income needs
Do you find it difficult to talk about money matters with your spouse? You may not have made everyday financial decisions together, but you should manage your retirement savings, income and cash flow together. In expectation of living on a more limited income, you should talk about how your budget will change.
Every couple needs to determine if their current lifestyle is sustainable or if they need to make changes to stay within their budget and make their savings last. Some spouses say, “I’ve been working all my life and I don’t want to be counting pennies now when I’m supposed to be enjoying my retirement.” Others don’t want to spend money on anything – “We can’t afford it!” – and that attitude is not conducive to a full and happy life.
Experts say the saver/spender combination in a marriage can actually complement each other. The spender makes sure that the family has nice things and does fun activities together. The saver makes sure there’s money to support their lifestyle now and in the future. Natural tendencies don’t have to rule our lives and cause problems.
Above all, don’t micromanage one another’s spending habits, and don’t hide your spending from your spouse. And, allowing for the occasional splurge is not going to be the end of the world.
Make your budget work for you and develop a plan together. Hold monthly or quarterly get-togethers to review your finances. Both spouses should understand their financial situation and agree on how to manage their spending habits. When couples co-ordinate their spending habits it not only leads to smoother relationships, it also results in more money going to shared goals that they value.
Don’t ignore differences in financial experience
With many couples, one spouse is the primary decision-maker and assumes the responsibility for managing the household finances. They often assume that their partner doesn’t want to be more involved. Indeed, the other spouse might not be comfortable making big money decisions or have the knowledge to evaluate investments or various financial options.
Improving your spouse’s financial literacy is just, for the most part, a matter of talking about your money – your cash flow and investments – and how you make the decisions.
If your spouse is not comfortable making financial decisions how will he or she handle them when alone, or how to select the appropriate person to help out. You don’t want to leave your spouse with the added stress of figuring out your financial situation.
Make sure your spouse has met your financial advisor, if you have one.
Maximize lifetime payments
Married couples have a great opportunity to maximize government benefits and company pension payments by timing their claims the right way.
Decisions must be made about when each spouse will apply for benefits – as early as age 60 or push it to 70. One spouse may want the money right away and the other thinks they should wait.
Consider survivor benefits. In some cases, it makes sense for the lower earner to claim benefits early while the higher earner delays so their higher benefit will continue for the life of the longest-lived spouse.
If you have a pension plan, consider the impact of single payments (100%) vs joint survivorship payments (50 – 100%).
Many retirees cash in their pension plans thinking that it’s better to have the money available when they want it rather than being paid out over their lifetime. It’s hard to turn down a lump sum but this is often not the best decision. You can calculate the rate of return that you would have to earn on investments to deliver the same income the annuity option offers. In many cases it would be very difficult for you to achieve an equivalent rate of return.
Be cautious of advisors who tell you they can “do better” than your pension plan.
Don’t forget about taxes
Taxes can have a tremendous impact on your retirement savings. The best retirement plan for a couple sets up the same level of income for each of them (as much as possible).
The biggest tax benefit available to Canadian couples is the ability to split employer pensions (at any age), and RRIF payments after age 65. The total payout won’t change, but couples may get to keep more if splitting the payments puts more income in the hands of the spouse in a lower tax bracket.
You can also split CPP payments. However, unlike other pension splitting rules where any split is acceptable, CPP pension sharing is based on the number of months you and your spouse lived together while contributing. You must apply to share your pension.
When you reduce your annual income, you can proactively implement a retirement savings withdrawal strategy when your marginal tax rates are lower.
Don’t forget about RRSP contributions even post-retirement. After you retire, your unused contribution room doesn’t disappear. You could continue to make contributions to your own RRSP until the end of the year you turn 71 and spousal contributions until your spouse turns 71.
Why would you want to do that when most people are thinking of withdrawing?
- If you are liquidating assets that would push you into a higher tax bracket such as the family cottage or a business.
- If your income in retirement is more than you expected, such as if you’re working part-time.
Consider your life expectancy
The odds are high that one or the other of you will live longer than you may think. Although it can be difficult to have discussions about life expectancy it’s important that you plan for this.
Even if your budget works out just fine as a couple, you should check how it will play out when one or other of you dies. After the first death, the survivor’s guaranteed income will decline. One of your OAS payments will be lost as well as some CPP payment. The amount from an employer pension might drop too depending on the choices you made when you left the job.
Make some budgetary changes if your projections show that one of you (typically, but not necessarily, the wife) would struggle if left alone.
Perhaps more life insurance would fill the income gap.
Health differences also matter as they affect your need for long-term care, your health-related expenses, and the types of activities you engage in during your retirement. Have an honest conversation with your spouse about this to make sure they are left in good hands.
Annuities and long-term-care insurance can be used together to ensure that you have both a steady cash flow, as well as contingency funds that can be used once the need for long-term care arises, without major impact to your day-to-day retirement income.
From a financial planning perspective, your goal is to reduce the risk on your household balance sheet both now and in the future.
A financial planner could model some scenarios, identify vulnerabilities and suggest strategies that might be available to you.
For example, would the 60% survivor pension be required to meet your wife’s financial needs if you predecease her, or does she have sufficient additional income and assets to take the risk of opting for the single-life pension?
What if your spouse is quite a bit younger?
If there is a large age gap between the two of you, this must be factored into your income distribution plan. The main goal is ensuring the younger partner will have sufficient income to last for life.
You will need a different investment approach in the accounts that must be used up sooner but don’t base the entire portfolio on the older partner. That could cause the younger spouse to miss out on additional growth and earnings.
It might make sense to buy a deferred income annuity for the younger spouse.
Having more life insurance on the older spouse could also help cover a savings and the longevity difference. This would allow the younger spouse to spend assets at a higher rate while the older spouse is living, knowing the bucket will be refilled upon their death.
Couples with a large age gap must create a plan that works for them both while they’re living and also make sure the surviving spouse is financially stable.
Review your beneficiaries
Remember when you first started your RRSPs and TFSAs? You included the name of one or more beneficiaries – often your spouse was named, but sometimes your children or the estate. You may want to revisit these (and also life insurance policies) to make sure they are in line with your wishes and survivorship needs. This is especially true if you are in a second (or more) marriage.
Keeping beneficiary designations up to date is the easiest way to ensure a smooth transition of your assets.
Review your will. You may want to balance the needs of your spouse with the desire to leave something to your children or grandchildren.
Here’s an example of a mistake. Ted is in his second marriage and chose the single-life option on his pension and made his wife the beneficiary of his RRIF. When he passed away 2 years into retirement his pension payments immediately stopped. In this case, it would have been better if Ted had chosen a joint-life option that continued the pension to his second wife and left the RRSP to his sons from his previous marriage.
The bottom line
The sooner you are aware of each other’s goals, the more time you have to work toward a shared ideal.
These can be rough conversations if your differences are large. Somehow you need to get to the same page. The quality of your retirement will depend not only on finding new things to do but on developing new ways of living with each other. Face facts. Set priorities and negotiate compromises. You can achieve a better outcome by planning together.
For a few, there might be substantial changes in the way you live, such as selling your house and renting an apartment. That’s a tough decision but the sooner you re-organize your financial life and manage your cash flow for the long term, the faster you’ll find you way to peace of mind and achieve a better outcome for the present and the future.
If you don’t want to do the math yourself, or for complex or multiple choices seek the advice of a qualified financial planner. It might be the best investment you could make.