Joint Retirement Account: What To Avoid Doing

Many working couples dream of the day when they can retire and sail off into the sunset together. The investment and insurance industries have done much to convince the public that this ideal is possible only with the help of certain products and services, and the financial media has endorsed that idea.

However, couples should take a moment to consider whether retiring at the same time is a wise course of action. This article will compare the financial ramifications of joint retirement versus one spouse working longer than the other, and why the latter option may be more advantageous in the long run. It's a good idea to start thinking about these issues earlier than you may realize – say, at mid-career, when there is still time for each partner to map out a trajectory of how and when they'd like to leave the workforce and how those plans mesh together.

“Unless couples are the same age, and in the same health, it usually makes more sense for one person to retire earlier. There can be both financial and relationship benefits,” says Morris Armstrong, registered investment advisor, Armstrong Financial Strategies, Cheshire, Conn. Financially speaking, the advantages are threefold. When one spouse works longer, the amount of Social Security benefits the couple is entitled to will increase. In addition, the continued income from the working spouse gives the couple a few more years to save for retirement. Finally, a spouse who works an extra three to five years will likely have a shorter period to need his or her retirement assets, allowing for larger withdrawal amounts each year.

“A delay of five years is a hugely positive move for couples who are just on the edge of having enough money saved, for those who have a family history of longevity or for those who simply need to work five additional years to get to ‘enough,’” says Jane Nowak, CFP®, financial advisor with Wealth and Pension Services Group, in Smyrna, Ga.

The following example clearly shows how much of a difference an extra five years of work can make for a couple:

Example – The Benefits of Working Longer Larry and Sally Griffen are both 60 years old. They each earned an average of $40,000 per year during their working years. Both come from families with longevity, and each expects to live to age 90. Larry and Sally both plan to retire at age 65. At their current rate of saving, the couple will have $300,000 of joint retirement assets by that time. When each reaches full retirement age (for their birth year), at 66 and six months, they will be entitled to full Social Security benefits. Assuming that the Griffens' investments earn an average of 6% per year, they can expect to receive approximately $24,137.75 per year in retirement in addition, with a depletion of assets by age 90. The Griffens can realistically expect their joint retirement income to drop to close to 50% of their pre-retirement income, depending on when they decide to start drawing Social Security. The Social Security benefits online calculator reports that Larry and Sally can each expect an annual benefit of approximately $18,850 if they each retire at age 66½. This would bring their total annual retirement income up to approximately $61,837.75 ($18,850 + $18,850 + $24,137.75) per year – a roughly 30% drop in income from their $80,000 pre-retirement income. But then Larry starts to contemplate what would happen if he were to work for another five years. If he did, he could step up his contributions to accumulate another $30,000 in his retirement plan (15% of $40,000 = $6,000 x 5 years, plus investment growth) and would draw on it for five fewer years. If the Griffens are able to postpone any retirement plan distributions until Larry retires at 70 (since he will still be earning a salary), and Sally begins taking Social Security at age 66½, they could reasonably expect to have a total of approximately $437,000 in retirement assets. Larry will also get enhanced Social Security benefits of  $28,332 per year (instead of $18,850). If their investments continue to grow at 6% and they still deplete their assets at age 90, their total annual retirement plan distributions would come to about $36,000, plus $47,182 of total Social Security benefits. This effectively replaces the income from their jobs until age 90. Of course, the Griffens would be wise to draw on their plan assets a little more slowly, so they have a cushion in case one or both of them should live past their estimated life expectancy.

This example clearly illustrates the financial impact that just a few more years of work can have on a couple’s retirement. The triple power of increased Social Security benefits, increased retirement savings and the reduction of time over which to draw on those savings can mean the difference between a financially secure retirement and one that is marked by financial hardship.

Another major factor to consider is health insurance. If, in the previous example, Larry continues to work for another five years, he can keep his health coverage provided through his employer. This would save the couple from having to pay for five years of higher health insurance premiums at an individual rate.

Retirement in the modern era can be an emotionally complex proposition. Losing one’s sense of identity through work can be a major adjustment for some, while others are able to make this transition with relatively little difficulty. When a working couple retires, they suddenly find themselves at home together all the time, without the separation of work that they may have become accustomed to. This sudden shift can often disrupt a couple’s established relational boundaries. As such, it may be easier for couples if only one spouse goes through this process at a time, especially if either spouse expects to have difficulty adapting to the new lifestyle.

This gives at least one of the spouses (perhaps the one who is expected to have more difficulty with the process) some time alone to begin creating a new identity while some elements of their relationship, including separation during the day, remain stable. If both spouses retire at the same time, the emotional impact on each partner – and on their relationship as a couple – can create friction that might otherwise have been avoided. If both spouses struggle to find new paths for themselves, they may end up taking their frustrations out on each other.

Retirement is a complex and expensive phase of life. When couples stagger their retirement dates, they can reap both financial and emotional rewards that will make this vital transition easier. Life may, of course, shape which partner ends up retiring first and change the plans the couple made when they were younger. One person's job situation may shift, or health issues or problems with other family members could intervene.

“A staggered retirement date is a great idea for financial and marital health reasons,” says certified financial planner Kristi Sullivan, Sullivan Financial Planning, LLC, Denver, Colo. “Financially, it allows you to more slowly draw down assets in early retirement. If anyone is under the age of 65, the working spouse can hopefully carry medical insurance to bridge the gap until Medicare eligibility. Also, not retiring at the same time can let couples find their groove in retirement without being on top of each other right away.”

Thinking about it in advance will make this process easier, whatever happens. There are many resources available that couples can turn to for help in the decision-making process. For more information visit the Social Security website www.ssa.gov or consult your financial advisor and retirement counselor. Retirement Planning for Couples will also help you with these issues.