One Working Spouse in Retirement
Written By: Ryan Rink, CFP®, EA, ChFC®, CLTC®
Retirement is one of the biggest transitions a couple will go through, especially when one spouse retires before the other. There are several financial considerations clients should keep in mind when one spouse continues to work, including income planning, Social Security and health insurance.
Income & Expenses
A major consideration upon the retirement of one spouse is to review the impact on income and expenses. Here are some questions to think about:
1) How will expenses change with one spouse now retired? Will they increase, decrease or stay the same?
2) Will the working spouse’s income be enough to cover expenses? If not, where do they get the extra income?
Most clients wish to live a similar lifestyle compared to pre-retirement, but it’s common that the working spouse’s income alone is not sufficient to meet all living expenses. The question then becomes how they will supplement the need for extra income. In some instances, the retired spouse may choose to consult or have a hobby job to earn a little extra money. Others may have pensions available to draw on from their past employers. Some start taking Social Security (there are special considerations that we will discuss in the next section). Many begin drawing on their savings/investment accounts. If you are pulling from your investment accounts, be sure to coordinate with your advisor to determine which accounts to draw from.
In all instances, clients should create a retirement budget that takes into account their new income levels and any changes in expenses, such as healthcare costs, travel expenses or hobbies.
Come age 62, you are now eligible to start collecting Social Security benefits. If you choose to draw before your Full Retirement Age (67 for most), there are a few things to be mindful of:
Social Security Taxation: Social Security is taxed differently depending on your total income. The amount of your benefits subject to federal taxation can range from 0-85%. With one spouse still working full-time, it’s likely that 85% of your benefit would be subject to income tax.
Benefit Reduction: If you elect to start your benefits early, you are locked in to receiving the reduced amount. Your benefit is reduced about one half of one percent for each month you start your Social Security before your Full Retirement Age. Benefits continue to increase each month until you reach age 70. With one spouse still working, it may make sense to wait on drawing your benefits so they can continue to grow.
Earnings Test: Those who retire early are subject to something called “earnings test”. Let’s say the now retired spouse decides to have a consulting job in retirement. If you earn more than the 2023 Social Security annual limit of $21,240, you will be required to pay back some or even your entire Social Security benefit. That being said, it may make sense for the retired spouse to hold off on drawing their benefits if they plan on working part-time and earn more than the earnings test limit.
Another important consideration is the couple’s health insurance. If one spouse retires early, does the other have health insurance available through their employer? This is especially critical if you are retiring prior to age 65 (when you’re eligible for Medicare). Things are typically straightforward if the working spouse has health insurance coverage available through their employer. However, if they do not, then the couple will need to find coverage elsewhere. Usually, the best options are either COBRA through the retiring spouse’s work, or the open marketplace. In this instance, we strongly recommend working with a qualified independent health insurance agent to assist with analyzing the various coverage options.
Planning for retirement is already complex, but it becomes even more complicated when one spouse retires while the other is still working. By reviewing your income and expenses, when to draw Social Security, as well as determining a plan for health insurance, you can create a plan that ensures financial stability and meets your retirement goals. We’re here at Shakespeare to help you navigate this significant life transition successfully. Please reach out to your Shakespeare Financial Advisor with any questions regarding your specific retirement situation.