Financial Planning for Couples with an Age Gap: A Personal Guide

Financial Planning for Couples with an Age Gap: A Personal Guide

Jake Skelhorn
April 2, 2024

When you're in a relationship with a significant age gap, as is commonly the case in the gay community, the financial planning process looks a bit different. As a financial advisor who's worked closely with couples in this situation, I've gathered some insights and advice to help you both navigate these challenges with confidence and clarity.

Finding Common Ground on Retirement

One of you might be thinking about retirement and slowing down, while the other is still in the thick of their career. It's important to sit down together and have a heart-to-heart about your retirement dreams. What does retirement look like for each of you, and how can you synchronize your plans? This conversation is the cornerstone of building a future that feels right for both of you. 

In a perfect world, a couple with an age difference will be in a financial position to retire at the same time. Before we even think about the financial side, ask yourselves: what are we going to do with all of our free time? After a long career, work becomes a big part of our identities. Most tend to know exactly what they’re retiring from - the 40+ hour per week commitment of your time and energy (whether you enjoyed your job or not) - but often overlooked is the thought of what you’re retiring to. That is, what will continue to give you purpose in life after work? Be it travel, volunteering, picking up a new hobby, exercising, cooking, or learning a new skill, the key to retirement is keeping the mind busy as much as the body. Discuss this aspect of your retirement with your partner well ahead of time.

Now, let’s get into some of the financial aspects.

Sorting Out Health Insurance

When the older partner retires and waves goodbye to their employer's health insurance, figuring out the next steps can be tricky. It's all about exploring your options—whether it's hopping onto the younger partner's plan, buying marketplace health insurance, utilizing COBRA, or looking into other solutions until Medicare kicks in at age 65 (assuming you’re not there just yet). The goal is to ensure both of you have the coverage you need without breaking the bank. Oftentimes, the most affordable option is joining the still-working partners group employer plan, if available. 

Making Sense of Pensions & Social Security

If there's a pension in the picture, deciding how to handle it is a big decision. Opting for a benefit that continues for both lives, known as a “Joint and Survivor” election, might mean a smaller monthly payout, but it offers peace of mind knowing that the surviving partner will be taken care of. The decision here also depends on what other assets will be used to supplement the pension income, such as investment account balances, social security, retirement accounts, rental income, etc.

Social security claiming strategies can vary drastically in monthly payment amount and expected lifetime payments. If we all knew when we’d die, this would be an easy calculation, but we don’t. 

At full retirement age (at or slightly before age 67 depending on when you were born), you will be able to claim what’s known as your primary insurance amount, or PIA. Claiming benefits before full retirement age, which can be done as early as age 62, will reduce your monthly payment amount. Delaying benefits, which can be done as late as age 70, will increase your monthly payment amount. Note: Benefits are calculated using your 35 highest earning years, which means if you retire early or before 35 total years of employment, $0 will be used to “fill” the remaining years and will reduce your benefits.

Because of this, it makes sense in most situations for the higher-earning partner to delay benefits, since their benefit amount will result in more dollars than if the lower earning partner did so. When the inevitable happens and the older partner passes, the younger partner will get a survivor benefit, which is the greater of their own benefit amount or half of the spouse’s amount. So even if the younger partner claims their benefit early, the higher earning spouse’s benefit could still result in a higher payment amount down the line.

For example: 

Spouse 1’s Benefit: $5000

Spouse 2’s: Benefit: $2100

When Spouse 1 passes, Spouse 2’s survivor benefit will be $2500 since it is the greater of the two.

Aligning Your Investment Approach

Your investment strategies might not be on the same page right now, and that's okay. The younger partner might still be in growth mode, while the older partner is thinking more about preservation and income. Finding a balance that supports both of your goals is key. It might take some compromise, but it's all about working together towards a common goal.

If the older partner is over age 59 ½ at their retirement, then their investment allocation should probably be more conservative than the younger spouse, especially if they are younger than 59 ½ . The younger spouse will be penalized (with some exceptions) if withdrawals are taken from their retirement accounts before age 59 ½ , creating a longer investment time horizon. A longer time horizon typically means a greater capacity for risk - or a higher allocation to stocks vs. bonds in a given investment account. 

It’s also important to have a tax-efficient withdrawal plan in place, which I wrote more about here. Knowing the most efficient order to pull money from various investment accounts can dictate not only your tax liability but how those accounts should be invested.

For example, let’s say you are age 54 and your spouse is retired at age 66, and you both have Roth IRAs, Traditional IRAs, and an individual investment account each. If you both determine that you need to start drawing income from investment accounts, the older spouse’s accounts should be more conservative than the younger spouse’s to avoid what is known as “sequence of return risk”. Sequence of return risk is the risk of a significant market drop early in retirement that is difficult to recover from since you are liquidating funds in a down market to live on. 

By allocating the more aggressive investments in the younger spouse’s accounts, and not relying on them for withdrawals/income, this accomplishes 2 things: 

  1. The younger spouse’s assets will have a better opportunity to rebound.
  2. No early withdrawal penalties are incurred by the younger spouse

To take it a step further, the older partner’s accounts should be invested according to their tax friendliness as well. Roth IRAs generally want to be left for last, so as to maximize potential growth as long as possible since it’s all tax-free (after 5 years and age 59 ½ ). Tax deferred accounts (Traditional IRAs, 401ks, etc) should hold most or all of the household’s bond allocation as the interest is not taxable inside of an IRA like it would be in a brokerage account. Taxable brokerage accounts should hold tax-efficient vehicles like ETFs over mutual funds to keep tax liability low.

Estate Planning: Protecting Your Shared Future

Estate planning takes on extra importance for couples with an age difference. It's about making sure your wishes are clear and that the younger partner is supported in the future. Whether it's through beneficiary designations, trusts, or other estate planning tools, taking the time to get this right can give both of you peace of mind.

I usually recommend that clients meet with a trusted and vetted estate attorney to ensure their post mortem wishes are granted. 

Your Journey Together

Financial planning for couples with an age gap is deeply personal. It's about more than just numbers on a page; it's about building a shared vision of your future together. Communication is your best tool. Don't be afraid to dive into these conversations and explore your options together.

And remember, you're not alone on this journey. Whether you need a sounding board, some guidance, or just a bit of reassurance, a financial advisor can help you navigate these waters and make decisions that bring you closer to the future you're dreaming of, together.