Liz Koh: Retirement Planning for Age-Gap Couples

Couples with a big age gap between them face a number of potential hurdles, not the least of which is how to deal with the financial implications, particularly in terms of planning for retirement. Just under a quarter of couples have an age gap of six years or more and in most cases the older person is a male. Statistics show that the bigger the age gap, the more risk there is of the relationship failing. While much has been written about the impact of an age gap on relationships, the impact on financial affairs is often overlooked. Love is much more important than money, however age-gap couples need to be aware of what may lie ahead.

Age-gap couples often have blended families, with one or both partners having children from a previous relationship and perhaps with each other. In the long term, this can create complexity for estate planning. An older partner has a natural duty to take care of his or her first family. First families can resent having to wait a decade or two to receive an inheritance from a parent who has left assets to a younger partner, yet a younger partner may be dependent on those assets to maintain an adequate standard of living. A life insurance policy taken out on the life of the older partner can free up funds to pay out first or second families on death, however, with age the premiums can become substantial.

Along with a gap in age it is usual to find a gap in the value of financial assets at the start of a relationship. Over time this becomes less of an issue, but for relationships which start close to retirement, this can present a problem, especially when each partner is still managing their own affairs separately. A younger partner with fewer assets or a lower income may not be in a position to retire when the older partner is ready to retire. Differences in financial means can impact on spending plans in retirement, such as for overseas travel.

There is no doubt that an age gap requires a bigger retirement nest egg for a couple. The retirement time frame can lengthen considerably. It lasts from the time the older partner retires to the time the longest-surviving partner dies. Of course if one or both partners work longer this will help reduce the time frame and the need for more retirement capital, but this is at the cost of not being able to enjoy time together when both partners are able to lead an active life.

Choosing when to retire needs careful thought. A younger partner may want to retire early to be able to travel and enjoy life with an older partner, but this can mean loss of career opportunity and loss of financial independence. If the relationship is a relatively new one, this could be a significant risk for a younger partner. If it doesn’t last, he or she could find themselves without a job and out of pocket.  A younger partner can receive NZ Superannuation jointly with an older partner who is over the age of 65, however in this case, superannuation payments for both will be abated by 70 cents in the dollar for each dollar of combined income over $100 per week.

Investment strategies for retirement portfolios need to be modified when there is a large age-gap or, for that matter, a big difference in life expectancy. A prudent approach can be to split an investment portfolio in two, each invested with a different time frame in mind to match the life expectancy of each partner. Older partners often worry about what might happen to the younger one in the long term, and setting aside a separate portfolio can reduce this anxiety. With a longer time frame, the younger partner’s portfolio can have a higher exposure to growth assets such as property and shares to ensure the value of the portfolio keeps ahead of inflation. It is possible that a younger partner will spend much of their retirement living alone, which is expensive. Rates, insurance and home and vehicle maintenance costs still need to be paid and increase over time.

One way to reduce the risk of a younger partner running out of money is for that partner to purchase a variable annuity which will give a guaranteed income for life. This product has a built-in insurance component which ensures that the annuity continues to be paid even if the account balance reaches zero. Locking in a younger partner’s retirement income in this way means money can be spent earlier in the retirement of an older partner without worrying about the long term, so retirement can be enjoyed together. Money may be needed for travel, healthcare or to support dependent children in this stage.

An age-gap or life-expectancy gap means retirement needs to be carefully planned taking into account specific circumstances and goals. There is no magic solution but a good financial plan will allow two people to enjoy the time they have together. 

Find out using our Lifetime Income Calculator.