May-December couples need to mind the gap

Age may not matter to people in love. But for May-December couples planning for retirement, their gap in years can bring challenges that go beyond reducing a golf handicap or crossing zip-lining in Costa Rica off their bucket list.

“Many couples look forward to enjoying that next chapter in their lives together,” says Ian Calvert, a financial planner and portfolio manager at HighView Financial Group in Oakville, Ont. “But when you’re a couple with a large age gap, the question becomes: Can you actually retire at the same time? And if you can’t, what will that mean for both of your lifestyles?”

Whether or not they exit the workplace in sync, these couples need to consider how the timing of their retirement could affect their finances and the dynamic of their relationship, says Mr. Calvert. Even wealthy May-December couples aren’t immune from these challenges.

“High-net-worth couples may not have to worry so much about being financially ready for retirement,” he says. “But if they decide that the younger partner should retire early, or, in an opposite scenario, continue to work, this will have some kind of impact on them down the line.”

A common theme among couples with an age gap is a desire to pack a lot of activities – such as travel – in the early years of retirement while the older partner is still healthy, says Lorne Zeiler, vice-president, portfolio manager and wealth advisor at TriDelta Financial in Toronto.

But making large withdrawals from a retirement nest egg to fund these activities could leave one or both of the spouses short of money later in life.

“[Clients’] retirement funds need to last all the way to death, and if you have a scenario in which one spouse is 70 [years old] and the other is 45 [years of age], you need to make sure [they’ll] have enough for both of [their] lifetimes,” says Mr. Zeiler. “That’s why sitting down with [them] to create an actual plan is key.”

If the plan calls for the younger spouse to exit the workplace early to join an older partner in retirement, then the couple should figure out how the missed years of income could affect their cash flow and ability to continue growing their wealth, says Mr. Zeiler.

Considering the timing and source of retirement income withdrawals also is important, says Sue Derlago, vice-president and senior financial planner at Calgary-based Mayert, Larson and Derlago Wealth Management Group, part of Canaccord Genuity Wealth Management.

“Often, we will recommend for the younger spouse to defer drawing from their Canada Pension Plan for as long as possible, perhaps until the age of 65, so that they receive larger amounts when they do start to draw,” she says. “Similarly, if the younger spouse has a workplace pension plan, it’s absolutely critical to choose the option that will provide the highest benefits possible.”

The biggest retirement risk among couples with an age gap – regardless of who retires when – lies in the younger spouse outlasting the older partner and outliving the money, says Ms. Derlago. Typically, the younger spouses are women, which makes it even more likely that they will outlast their partners by more than a decade.

“One in four Canadian women are making it to the age of 94,” says Ms. Derlago. “So, if you have a younger spouse who’s drawing down her retirement pool when she’s 55, that’s another 40 years that she and her husband need to make sure they are able to provide for financially.”

With such a long retirement period, even wealthy couples are at risk of seeing their investment assets eroded over time, says Ms. Derlago. “So you really need to manage the early years when [they’re] drawing down [their] assets to make sure [they’re]not taking out too much.”

Although it may seem like a good idea for the younger spouse to invest in higher-return investments in the years before early retirement, this transition period should instead be used to create regular and stable income, says Mr. Zeiler.

“Focus on assets with natural income, such as [real estate investment trusts] and dividend-paying assets,” he says. “As [these clients’] time horizon for retirement gets shorter, you should be moving [them] into safer assets because as soon as [they] start withdrawing from [their] investments, it becomes harder to withstand those market ups and downs.”

For May-December couples who choose to put off the younger spouse’s retirement, a spousal registered retirement savings plan (RRSP) can create tax efficiencies, says Lisa Gittens, a senior tax professional at Calgary-based H&R Block Canada Inc.

The idea is for the older, retired spouse to contribute to an RRSP in the name of the younger spouse and claim these contributions as an income tax deduction. Ms. Gittens says this strategy could be especially beneficial for high-net-worth couples.

With that approach, these clients are “reducing [their] taxable income while building up a pension for [their] working spouse,” she says.

Another tax-saving strategy involves transferring up to 50 per cent of the older spouse’s pension income to the younger working spouse. But this makes sense only if the younger spouse is in a lower income tax bracket, says Ms. Gittens.

Couples with an age gap should also plan for how their relationship might change if one partner retires while the other keeps working, says Mr. Calvert. Coming home from a hard day at the office to a retired spouse complaining about a hard day at the golf course could be annoying to the working partner, he says.

In contrast, resentments also can flare up when the younger spouse in a May-December couple feels pressured to retire early, says Mr. Calvert.

“If the younger partner is just approaching the peak of their career and potentially missing out on their highest income years, they can feel like they’re giving up something that’s important to them,” he says. “It’s not an easy decision to make, so you need to take the time to really think about this.”