Should Couples Retire at the Same Time?

This article is a reprint from the Financial Planning Association.

It's bound to happen at some point for working couples. One spouse gets the itch to retire, or is forced to retire because of poor health or job loss. Since couples typically like to retire together, tough questions emerge: Should the other spouse retire, too, or continue working? What impact will retiring together have on the couple's income and future retirement benefits?

According to a July 2004 study by the Center for Retirement Research at Boston College, husbands and wives retire in the same year in one in five marriages, and half of all couples retire within two years of each other. As the study noted, "married couples often try to retire together." But this decision has grown much more complex in recent decades as more wives join the labor force, work at full careers, earn improved incomes, and participate in retirement plans. As a consequence, retiring close to each other may entail financial trade-offs.

Here are several financial and non-financial issues that couples will need to weigh when deciding whether to retire together:

Social Security. Assume that both working spouses are age 62 or older and are thus eligible for reduced or full Social Security retirement benefits. One spouse retires and begins collecting benefits. The second spouse generally is entitled to receive either a monthly check equal to half of the amount of the monthly benefit his or her spouse receives, or an amount based on his or her own earnings—whichever is larger. (An exception for spouses collecting half of their spouse's Social Security benefits occurs if they are part of a government pension plan not covered by Social Security; then their benefits may be reduced or even eliminated.)

Consequently, if the retiring spouse earns a considerably higher income than the other spouse, the second spouse could immediately retire without diminishing their total Social Security benefits. But if the second spouse is earning income comparable to or higher than the retired spouse, the decision is more difficult. That's because the longer the second spouse works, the higher his or her individual Social Security benefits will likely be when he or she ultimately retires.

This trade-off is especially an issue where there are significant age differences. Say a husband retires at 66 at full retirement benefits, but his wife is only 62 at the time. If she retires right away and starts collecting monthly benefits based on her own earnings, those benefits will be reduced from what she would have collected had she worked to her full retirement age.

Private retirement plans. Age and income differences are also important when figuring in benefits from employer retirement plans. Assume that both spouses work for employers with traditional pension plans that pay lifetime annuities, but one spouse is five years older than the other. As with the Social Security illustration, if the older spouse retires at his or her plan's normal retirement age, and the younger spouse retires, too, then the younger spouse won't be able to maximize his or her pension benefits.

The same consequences apply where spouses participate in defined-contribution plans such as 401(k)s. Should the younger spouse retire when the older spouse retires, then the younger spouse no longer is able to contribute to his or her retirement nest egg.

Health benefits. Increasingly crucial these days for retirees is the challenge of maintaining health care coverage should they retire before they qualify for Medicare. Say the husband retires at 65. He's eligible for Medicare. But his 63-year-old wife won't be eligible for two more years. The federal COBRA program covers only up to 18 months. So unless her employer offers a subsidized retiree health care plan, she'll probably have to either keep working or find potentially expensive private coverage, for which she may not qualify if her health is poor.

Nonfinancial issues. The decision whether to retire when your partner retires is further complicated by nonfinancial factors. If one partner retires—particularly early due to poor health or job loss—the other person may not be psychologically ready to retire. Couples sometimes have conflicting visions of retirement—one wants to relax at home while the other wants to travel—that should be ironed out before both retire.

Easing into retirement through reduced work hours, if possible, can help reduce financial and nonfinancial conflicts, but most important is to weigh the trade-offs before deciding.