Retiring Before Your Spouse: Health Insurance, Income, and Timing
A couple sat across from us recently, and the wife said something that got a laugh in the room. The part she didn’t like about their retirement plan was getting up and going to work while her husband stayed in bed.
It was funny because there was some truth behind it. What happens when you’re ready to retire, but your spouse isn’t?
For some couples, retiring at different times makes perfect sense. One spouse may be older, further along in a career, or simply ready to be done working. But once one paycheck stops, several other parts of the plan can change with it.
Where will the missing income come from? What happens to health insurance? Could a lower-income year create a tax-planning opportunity? When should Social Security enter the picture?
A staggered retirement can work very well. It just helps to see those pieces together before somebody turns off the alarm clock for good.
Start With the Plan, Not the Date
Look at what you’ve saved, what you expect to spend, the income that will continue coming into the household, and how your investments are positioned. The goal is to understand what retirement looks like with one paycheck instead of two.
Once you know the plan can support that transition, you can start working through how to make it happen.
And one of the first questions may be health insurance.
What Happens to Health Insurance?
If you retire before becoming eligible for Medicare and your spouse is still working, there are several places to look for coverage.
One option may be joining your spouse’s employer plan. That can sound like the obvious choice, but it’s still worth looking at what the coverage includes and what it costs to add a spouse.
Another possibility is coverage through the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA may allow you to temporarily continue coverage through your former employer, although you may be responsible for more of the premium once you leave the company.
You may also explore coverage through the Affordable Care Act (ACA) marketplace.
This is where health insurance starts connecting to the rest of the retirement plan.
Eligibility for ACA premium subsidies is tied to household income. Meanwhile, the years after one spouse retires can sometimes create an opportunity to consider Roth conversions, which moves money from a tax-deferred retirement account into a Roth account and create taxable income in the year of the conversion. A Roth conversion could affect the income used to determine an ACA subsidy. So, the healthcare decision and the tax decision deserve to be looked at together.
On our team, Shawn Southard helps our clients evaluate coverage based on their needs. Having this piece addressed in our office with the rest of our team helps keep the planning smooth and convenient.
Plan for the Missing Paycheck Before It Disappears
Let’s say both spouses are earning $100,000 per year and one retires. On the retirement date, $100,000 of annual household income stops.
You may not need to replace every dollar of it. Your spending could change in retirement, and you’re no longer saving for retirement once you’re living it. But you still need to know where the money you do need will come from.
Having a written income plan is such an important part of our planning process.
The income plan becomes a reference point we can keep updating over time. It lays out where retirement income is expected to come from and helps us think through the order in which different accounts may be used. That order can matter.
Suppose you have cash in the bank and decide to use it to replace the missing paycheck for a while. Depending on the plan, that may be perfectly reasonable. But before spending down a large portion of those reserves, it’s worth considering what else that cash could help you accomplish.
For example, a lower-income year may create an opportunity to explore a Roth conversion. A conversion creates a tax bill, and having cash available may allow you to pay that tax without needing another withdrawal from a retirement account.
Income planning is more than asking, “Where can I get some money?”
Cash, traditional retirement accounts, brokerage accounts, and Roth accounts all get taxed on a different set of rules, and they can all play different roles. Thinking through the income gap ahead of time gives you a chance to decide how those pieces can work together rather than choosing an account whenever a bill comes due.
When Healthcare, Taxes, and Social Security Intersect
When one spouse stops working, household earned income may drop significantly. That change can create some interesting planning opportunities.
Roth conversions are one example.
You may have years when your taxable income is lower than it was while both spouses were working. Converting some tax-deferred retirement savings during those years could make sense as part of a longer-term tax strategy, like possibly shrinking future Required Minimum Distributions.
But now bring health insurance back into the conversation.
If you’re receiving an ACA subsidy, additional income from a Roth conversion may affect that subsidy. The conversion could still make sense, but its impact on healthcare costs belongs in the analysis.
Social Security adds another consideration.
If the retired spouse is eligible, claiming Social Security could provide income to help fill the gap left by the paycheck. But when you claim Social Security affects the benefit you receive going forward, so it deserves more thought than simply using it as the next available source of income.
Now you can see why these decisions are better considered together.
You may have an opportunity for Roth conversions during lower-income years. You may be evaluating an ACA subsidy. You may also be deciding when Social Security should begin.
Taylor Wolverton, our Director of Financial Planning and Tax Strategy, has these conversations with our clients, helping them understand how a decision in one area affects the others, then establishing what combination fits the household’s longer-term plan.
A Retirement-Date Checklist
1. Review the old 401(k).
Leaving a job gives you an opportunity to decide what should happen to the money in your employer-sponsored retirement plan. Depending on the plan and your circumstances, possibilities may include leaving the money where it is or completing a rollover into an Individual Retirement Account (IRA). Investment choices, costs, and how the account fits into your overall strategy can all be part of that review.
2. Review healthcare and Medicare timing.
If you’re approaching age 65, start reviewing Medicare before your birthday rather than waiting until you get there. Medicare has specific enrollment rules and timing considerations, and existing employer coverage can affect the decisions you need to make. Reviewing your situation ahead of time can help you understand what applies to you and avoid enrollment timing issues that could potentially lead to penalties.
3. Check your beneficiary designations.
Retirement is a natural time to make sure the beneficiaries listed on retirement accounts and other financial assets still reflect your wishes. Check both primary and contingent beneficiaries rather than assuming older decisions are up to date.
While You’re at It
The transition into retirement can also be a useful time to review:
- Your estate plan
- Whether employer life insurance can or should be continued after retirement
- Long-term care planning
- Pension options and survivorship elections, if applicable
Not every item will require a change, but it can be reassuring to confirm these items are still in line with your goals while you’re already reviewing the bigger retirement picture.
Putting the Pieces Together
Staggered retirement is a good example. A client recently told us that a friend questioned why he would work with an advisor when he felt confident he could earn similar investment returns on his own.
Maybe he could. But investment returns are just one part of the puzzle. When one spouse retires before the other, you suddenly have the rest of the puzzle pieces on the table too.
You have to figure out healthcare coverage. You need a plan for replacing the missing income. That income decision can affect taxes. Tax planning can affect ACA subsidies. Social Security has its own timing decision. And somewhere in there, you still have to fit things like investments, retirement accounts, beneficiaries, long-term care plans, and more into the rest of your retirement plan.
You may already have some of those pieces exactly where you want them. The next step is seeing how the rest fit around them.