Most of us will have a special someone to share our retirement years with. But factoring someone else into your retirement planning can also make it more complicated to get an accurate projection of your retirement finances. Reflecting your spouse's information when planning for retirement is critically important. Doing so will affect your expenses, benefits, and taxes in retirement, as well as the time span for which you need to plan.
Couples tend to think of most of their expenses in terms of a family unit. But there are certain age-related expenses that need to be projected separately for you and your spouse. Aside from aging, regulatory factors come into play here, too.
Healthcare is a good example. Your healthcare costs are likely to change significantly with age, so an accurate projection of your healthcare costs must take age into account. Most of us can start receiving Medicare at age 65. If you or your spouse retires before age 65, buying health insurance on your own can be very expensive and your retirement planning needs to reflect that. Since most couples are of different age, this requires a separate projection for you and your spouse.
Your marital status affects your tax brackets, deductions, and exemptions, as well as the deductible limits to Individual Retirement Accounts (IRAs). What this means is that even if one of you doesn't earn any income, the very fact that you are married and filing your taxes jointly will affect your tax payments significantly. For example, as a married couple you can deduct $500,000 of the capital gain from the sale of your primary home, whereas single people can deduct only $250,000.
When you turn 72, you are required to start withdrawing a certain amount from your tax-deferred retirement accounts. This required minimum distribution needs to be determined separately for you and your spouse, based on your respective ages.
If your spouse is also working and saving towards retirement, you need to include and project their savings in your shared retirement plan as well. The timing of your spouse's retirement should also be factored into the math. For example, if one spouse continues to have some income after the other retires, this may significantly reduce the amount you need to draw from your retirement savings.
If your spouse never worked or worked significantly less than you, they may still be eligible for a Social Security benefit, thanks to the spousal benefit on your account.
Should one of you pass away before the other, the survivor will be eligible for survivor benefits from the deceased spouse's account. Under Social Security rules, the survivor will get the greater of the survivor benefit and their own benefit. Under employer pension plans, the survivor will typically get the survivor benefit on top of their own pensions, if any.
Statistically speaking, there is a high probability that one of you will outlive the other by several years. On average, husbands in the United States are 2.3 years older than their wives. At the same time, women live on average 5 years longer than men. This means that on average, wives survive their husbands by more than 7 years. You want to make sure you will have enough savings to last for the expected lifespan of the last survivor. Not reflecting your respective ages and life expectancies in your retirement plan can cause financial difficulties for the survivor just after losing their spouse. It is worth making sure these aspects are well accounted for.
There is practically no scenario where spouses can be ignored in retirement planning without throwing the entire calculation off. Unfortunately, it is usually only the more sophisticated paid retirement calculators that account for that level of detail. These tools are often used by large financial institutions to provide retirement planning services to their customers for a fee.
If you are looking for a robust and free option that reflects the age, life expectancy, retirement date, income, savings, and tax implications of your spouse, you may want to consider our retirement calculator, MoneyBee.