When Just One of You Is Retiring: The Money Issues Youll Face-Investing

When Just One of You Is Retiring: The Money Issues Youll Face

The Money Issues You'll Face

Every Business day, Linda Doughty goes to her job directing a staffing agency for a large healthcare corporation. While she works 10 and 12 hours at a stretch, her husband, Dan, who retired in early 2000, spends his time taking care of their house in Deerfield Beach, FL, supervising construction of the vacation Home the two are building in the North Carolina mountains and restoring a 30-year-old Italian sports car.

Married 21 years, the Doughtys always thought they'd retire together. But some unforeseen opportunities caused them to change their plans. Dan, 53, a former police major with 30 years on the force, was part of a group that was offered an attractive early retirement package. Meanwhile, Linda, 51, watched the tiny Business she helped found blossom into a 16-office enterprise -- and her salary grow along with it. Instead of retiring with Dan, she decided to work a few more years and save for an even more comfortable retirement. "I enjoy what I'm doing," Linda says. "And I feel to retire now just for the sake of retiring and then not be able to do anything would not be our style."

If you and your spouse think you may retire on different schedules, here are some of the money issues you'll need to work out.

Managing Your Income
The Doughtys are preparing for the day when both of them will be retired by living on Linda's income and banking Dan's pension checks, a strategy many financial advisers recommend. Experts also suggest minimizing the amount you take from tax-deferred accounts until both of you are retired. Otherwise, you'll pay higher income taxes on the withdrawals and risk depleting your retirement savings too soon. "As a rule of thumb, try to take money first out of the accounts you'll pay a smaller amount of tax on," says Deborah Voso, a certified financial planner in Frederick, MD.

To gain a wider variety of investment choices, the spouse who retires first can roll over his 401(k) into an IRA. But retirees who are under 59 1/2 may want to keep their money in the 401(k) for a while, since the rules governing withdrawals from such plans are often more flexible than those for IRAs.

As for Social Security, while it becomes available at 62, you'll get bigger checks if you don't start drawing benefits until at least the normal retirement age of 65 (or older, if you were born after 1937). In addition, if you are under age 65 and continue to work while receiving Social Security, you may lose some of your benefits because of the so-called retirement earnings test.

Tax and insurance Concerns

Retirees with old-fashioned defined benefit pensions will need to decide how long to extend the payouts. Married retirees automatically receive a "joint and survivor" annuity, which extends benefits through both spouses' lifetimes. But they may instead be able to opt for higher benefits that last only through the retiree's lifetime (a "straight life" annuity) if both spouses say so in writing before the payouts start. Because women tend to outlive their spouses, men who retire first generally choose joint and survivor payouts; a wife who retires first, on the other hand, may opt for payouts that only cover her.

Taxes and insurance
When one person retires, your tax rate may go down, although it could go up if you start withdrawing from tax-deferred accounts and incurring capital gains by selling off investments. What's more, if your provisional income (which includes your adjusted gross income, all of the interest from your tax-exempt investments, plus 50 percent of your Social Security benefits) exceeds a certain amount, your Social Security benefits will be partly taxed.

Additionally, if only the working spouse has taxes withheld during the year and the retired spouse has income on which nothing is withheld, you may need to pay quarterly estimated taxes.

You can probably discontinue life insurance on the retired spouse unless his or her income is essential. But hang on to the working spouse's disability insurance, if any, and consider a long-term care policy.

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