Love has no age limit.
Couples who meet in high school or college are typically less than 4 years apart in age. However, when spouses marry later in life, the age gap can be 10, 15 or even 20+ years.
Planning for spouses who have a large age differential presents unique planning issues.
Meet the Gladstones
Joe and Sue met at a friend’s cocktail party and hit it off. After a few dates, a friend pointed out their 15-year age difference. Joe and Sue never noticed their age gap. Once it was brought to their attention, neither gave it a second thought. They enjoyed each other and were happy together. They’ve now been happily married for many years.
Over time they’ve faced various planning issues.
Sue was a successful business owner, but ultimately sold her business to spend more time with Joe and to support his consulting company. Although they’ve been on solid financial footing, the success of their financial plan is dependent on Joe’s future income. By the time we started working together, Joe was 60 years old, and Sue a spry 45. We recognized the need for life insurance to protect Sue in the event of Joe’s premature death, and to insure his income for the 10 more years he planned to work. Fortunately, Joe was healthy and insurable. He purchased a 15-year term insurance policy that would pay out to Sue in the event of his untimely death. Each year we review their financial situation and decide whether they want to continue the policy.
It’s possible that Joe could have a long-term care illness while they are both alive. Joe was concerned that his end-of-life expenses would hurt their financial plan and negatively impact Sue’s lifestyle during his illness and after he was gone. We recommended the purchase of a long-term care policy on Joe’s life to protect against this risk. The decision was made not to insure Sue, based on the unlikeliness she would become debilitated while Joe was alive; and because she would have enough assets to pay for care out of her own pocket later in life, especially if Joe died prematurely (life insurance) or if he became ill and needed custodial care (LTC Insurance). Because Joe owns his own business, he can write-off the insurance premium through his business, effectively paying the premium with pre-tax dollars.
The difference in their ages became very important in discussions about investment risk and desired asset mixture between growth investments and more conservative instruments. Joe was nearing the end of his career and wanted to protect the assets they had accumulated. Sue was looking at a life expectancy of upwards of 40 years and wanted to be more growth oriented. We settled on a Growth & Income portfolio that provides some of what each spouse needs and wants. This strategy must be actively monitored and adjusted throughout various market cycles to make sure both of their objectives stay in balance (via rebalancing).
Social Security Planning:
Sue had a strong earning history while she owned a business; but her earnings dropped when she sold the business and began helping Joe with his consulting company. As a result, Joe’s earning history is stronger than Sue’s; and as such, his Social Security benefit is larger. Because Joe planned to work beyond age 70, it made sense to defer his benefit as long as possible (age 70), for two reasons. First, they didn’t need the income (and any income from Social Security would have added to their tax liability). Second, Joe’s larger benefit will last as long as either of them are alive. For every year Joe deferred taking his benefit, his benefit grew by 8%. By the time Joe began Social Security, it was a much larger benefit that will last the longer of their lives. It’s quite possible this benefit will be paid for over 35 years, assuming Sue lives until age 90. This provides Sue longevity insurance in the form of guaranteed Social Security payments.
Fast forward a few years and Joe is now turning the magical age of 70 ½ and Sue is 55. Joe must begin taking his Required Minimum Distribution (RMD) from his retirement accounts. He’s still actively working in his consulting company. His income at this point includes Wages + RMDs + Social Security. At the age of 70, Joe has the highest income of his entire life! Note: since Sue is more than 10 years younger than Joe, he is able to use a different life expectancy table which requires a smaller minimum distribution than the rest of us. This will help preserve Joe’s retirement accounts for Sue.
A question arises as to whether they should continue to contribute to his 401k while also having to take RMDs. Any contribution that Joe can make to his 401k will reduce his current tax burden, which is high given all the above income. Because Sue has been working with Joe in his consulting company, we recommended that they shift more income from Joe to Sue, allowing Sue to maximize her 401k contribution and to defer the taxation of these assets until she turns 70 ½. This will provide an additional 15 years of tax deferral for both of them, but especially Sue. Given that they are in a high tax bracket this year and will be in a lower bracket next year if Joe retires, they decided to make a larger than normal charitable contribution. By doing so, they maximized the tax deduction of the charitable gift. They used a Donor Advised Fund (DAF) as the vehicle to accept the gift and receive the tax deduction this year. The DAF allows them the flexibility to distribute the funds to their specified charities in future years.
Joe and Sue’s situation had a high level of complexity; but consider a few scenarios that could make their plan even more challenging.
- The high-income spouse is younger than the low-income spouse.
- The younger spouse has a shorter life expectancy than the older spouse.
- The older spouse has a more aggressive investment objective than the younger spouse.
- The spouses were both previously married and both have children from their first marriage.
Love has no age limit; but it certainly presents unique financial planning challenges. If you and your spouse have a large age differential, give us a call and we’ll sit down to discuss your unique situation.