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Retirement Planning for Age-Gap Couples

Posted On: Thursday, August 4, 2022

Retirement Planning for Age-Gap Couples

Age is an issue of mind over matter. If you don't mind, it doesn't matter.” (Mark Twain) 

When is an age gap significant?

If the age gap between you and your spouse is less than five years, you probably don’t have to worry too much about it when planning for retirement. We generally consider a gap to be significant when it’s 10 years or more. But it’s also important to consider –

  1. The health status of each partner
  2. Who the primary breadwinner is
  3. How comfortable the couple is financially.

Every situation is different, so please seek professional financial advice sooner rather than later.

The pros and cons of retiring at different ages

Depending on the dynamics of the relationship, there can be financial and psychological advantages to one spouse retiring earlier than the other. The younger spouse can continue to earn an income, taking the pressure off the family’s drawdown of retirement capital. What’s more, instead of both spouses having to adjust to retirement at the same time, one spouse can continue with a normal working life while the other gets used to living their best life.

On the flipside, retiring at different ages can also place a strain on the relationship. The retired spouse may want to travel, or move to Hermanus just when the younger spouse’s career is taking off. The working spouse could also resent the fact that they’re putting in long days at the office while the retired spouse is pruning the hydrangeas.

It’s increasingly common for financial planners to coach their clients regarding lifestyle decisions that impact their financial planning.

Making your retirement pot last longer

Depending on your circumstances there are many ways to approach age-gap retirement planning. One option is for the older spouse to delay retirement for as long as possible to defer the draw-down of retirement savings. A semi-retirement strategy or a lower income drawdown can also help to stretch your hard-earned savings further.

In our experience, cash-flow models which help clients to attribute value to the decisions, such as working a little longer, are particularly empowering. They put both the planner and the family firmly in control of their retirement.

Same same, but different

While an age gap does make retirement planning a bit more complicated, the basics still apply. And it all starts with understanding how much you’ll need to save for each year of retirement. While you might assume that your expenses will go down in retirement, this is hardly ever the case. For example, the savings you make on commuting can quickly be offset by rising healthcare expenses.

It's sometimes assumed that the younger, healthier spouse will be able to serve as primary caregiver if the older spouse falls ill. But this assumption underestimates the emotional and physical effort required to look after someone with a critical illness such as dementia. Age-gap couples’ budgets should take account of the need for a caregiver or frail care which can easily cost R25,000 per month.

It’s also foolish to assume that downscaling or moving to a retirement village will result in a big saving and unlock a large amount of capital. An apartment in a sectional title scheme or a cottage in a retirement village won’t come cheap.

Living annuity or life annuity?

If you’re unlikely to exhaust your retirement capital, no matter how long you both live, a living annuity is the default option as it gives you the opportunity for higher yields. Here it’s usually a good idea to base the underlying asset allocation on the age of the younger spouse and include more equity for growth.

If, on the other hand, there’s a chance of running out of capital if the younger spouse makes it to 100, transferring that longevity risk to an assurer via a life annuity is probably a better option (do read the fine print carefully and make sure you understand all the terms of the policy). In fact, as soon as you become aware that your living annuity is likely to be exhausted during the younger spouse’s lifetime, you should switch to a life annuity. Delaying this decision could see you living out your golden years on tea and crackers. It’s also possible to use a combination of living and life annuities.

Divorce me never

Divorce followed by a second marriage is often a reason for a significant age difference between spouses at retirement. This can have unfortunate consequences if the older spouse in a second marriage passes away, as an ex-spouse’s divorce order takes precedence over a current spouse’s claims against the estate. It’s vital that previously married spouses fully disclose their financial commitments to their ex-spouses and children so that their financial planner can take these liabilities into account when drawing up a retirement plan.

The bottom line

It’s complicated! Please don’t make any of these important decisions without consulting a financial planning professional. We’ve seen it all before and our door is always open…

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