Many two-income couples assume that they’ll retire at the same time and then transition to a new chapter in their lives. Reality: Only 20% of partners ­retire within one year of each other, according to a Fidelity Investments study.

Some “staggered retirements” happen when one spouse ­retires earlier than expected due to health problems or job loss…or one partner extends his/her working years because he wants to qualify for a full pension or enjoys his career.

Retirement expert Dana Anspach, CFP, RMA, says staggered retirement can produce unexpected financial benefits. Here’s how she has helped scores of dual-career couples navigate the financial aspects of retiring at different times…

What to Consider

When one spouse continues to work after the other stops working, it often sets into motion three powerful factors…

Waiting longer to start taking Social Security increases benefits. If one or both spouses put off taking Social Security benefits until full retirement age (age 66 to 67 if you were born in 1943 or afterward) or longer, it not only boosts lifetime guaranteed income but increases potential spousal and survivor benefits.

The working spouse can continue to save and invest aggressively for retirement—as much as $26,000 in a 401(k) and $7,000 in an IRA annually (if age 50 or over). He also can contribute up to $7,000 annually to an IRA or Roth IRA on behalf of a nonworking spouse and continue to fund health savings accounts (HSAs)—as long as the working spouse is not ­enrolled in any portion of Medicare—if the couple has a high-deductible health insurance policy. Details: IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) available at IRS.gov/publications/p590a.

The nonworking spouse can avoid or limit tapping retirement assets. Assets can continue to accrue, and the couple will need to draw on them for fewer years. This also protects against “sequence-of-returns” risk, which occurs when the first few years of retirement coincide with a bear market, a time when drawing on your portfolio can be damaging to your long-term returns and wealth.

Here’s a checklist for couples considering staggered retirement…

#1: Decide how long your staggered retirement will last. Knowing the age at which you both will be retired and drawing on your retirement income allows you to revise your original retirement plan to reach your new goals. You will have to recalculate how much you’ll have accumulated by then and the income that you’re likely to need in both the staggered and joint retirement phases to cover basic monthly bills, housing, discretionary costs and inflation. For help with these calculations, see the free calculator and tools at NewRetirement.com.

#2: Make sure the nonworking spouse has health-care ­coverage until eligible for Medicare. The best option typically is for the nonworking spouse to join the working spouse’s employer-subsidized plan until age 65. If that’s not possible, shop your state’s health-care exchange through the ­Affordable Care Act (ACA) at HealthCare.gov. Your household income may be lower after one spouse retires, so you could qualify for tax credits to offset premiums. The Health Insurance Marketplace Calculator at ­
KFF.org/interactive/subsidy-calculator lets you estimate premiums and subsidies in your state under various ACA plans.

#3: Adjust your monthly budget during the staggered period. Whether your goal is to minimize the financial problems caused by a spouse retiring early or maximize the advantages of a spouse working longer than expected, it’s important to make changes during the years when your household has only one income. Strategies I recommend…

Try living on only the working spouse’s salary. This may be feasible because expenses associated with working can be eliminated and taxes will be lower. Use the staggered period to see what you can live without when you are both retired and living on a fixed income in the future. If it turns out that you need to supplement your budget, your first step would be to stop contributing to savings, including 401(k) and other retirement plans, and see if you can live on the increased take-home pay. Beyond that, evaluate the tax consequences to determine which assets to tap into next.

Avoid big splurges until you are both retired. Often the retiring spouse feels that he deserves an immediate reward after decades of labor—perhaps an expensive new car or a kitchen renovation. Not only can this compromise your immediate budget and goals, it can lead to resentment from the working spouse.

The nonworking spouse should consider part-time work. It’s often the most effective solution if one salary is insufficient. Important: Run the part-time job past your accountant to find out if the additional income will push you into a higher tax bracket or affect any Social Security benefits you are receiving.

#4: Take advantage of a lower income tax bracket. Many staggered-retirement couples are in a lower tax bracket than before the spouse retired, especially if it is the main breadwinner who stops working. What to do…

Take profits on investments in taxable accounts, especially if you’ve been reluctant to sell stocks or funds with large, embedded capital gains. For 2021, if you are married, filing jointly and your joint taxable income from all sources after applicable deductions is $80,800 or less, your capital gains tax rate is 0%.

Consider Roth conversions. It may make sense to pay taxes on the income in IRAs now in order to avoid taxes on withdrawals later if your taxable income at age 72+, when you have added income from required distributions and Social Security, will put you in a higher tax rate than your current rate.

#5: Time Social Security right. If one spouse works longer, a couple can earn tens of thousands of extra dollars over their lifetimes by coordinating when each spouse takes Social Security.

Rule of thumb: If the spouses are close in age, the higher-earning spouse should delay Social Security benefits until age 70. If the age difference is greater than four years, then run your situation through software to maximize your lifetime benefits. Helpful resources: OpenSocialSecurity.com offers a free calculator that allows you to run Social Security–claiming scenarios. MaximizeMySocialSecurity.com is a more powerful calculator developed by Boston University economics professor Laurence Kotlikoff, PhD, which allows you to input a wide range of factors to determine the best claiming strategy. Cost: $40 for an annual household license.

For unmarried couples: Much of the same advice applies, but you may face additional hurdles and should seek advice from a financial planner. Example: The retiring partner may not be eligible for coverage under his/her working partner’s health-care plan unless he has domestic partnership rights, which vary from state to state. And each spouse will not be eligible for ­Social Security spousal and survivor benefits if the couple is not married. Also, income tax bills for married couples filing jointly or separately tend to be lower than for unmarried couples filing separately.

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