Retirement Planning Using The Optimal Retirement Planner: Differing Spouse Retirement Years

Most retirement planners assume that spouses retire at the same time. The Optimal Retirement Planner allows users to use differing assumptions.

James Welch, creator of the Optimal Retirement Planner, recently had the following exchange with an ORP user:

To ORP [Feb. 25, 2011]: If I set the joint retirement age at 66, then looking at the reports, that means that the deferred and tax free contributions I have shown for my wife are assumed to stop when I am 66? That is my wife who is six years younger than myself is assumed to no longer work, or at least no longer make IRA and 401K contributions for the six years until she "retires". I thought about putting her down for six years of post retirement income but that still did not allow me to show her contributions.

From ORP [Feb. 26, 2011]: Indeed ORP does assume that contributions to both spouses' accounts stop when the principle spouse retires. The idea is that husband drawing down his IRA while wife is still contributing is taking money out of one pocket and putting it into another. A wife still working while husband is on the golf course seems like an unlikly scenario. In other words, ORP assumes that both spouses retire in the same year. (Most of the other retirement calculators on the Internet make the same assumption.)

The ORP user responded to point out that there are a considerable number of scenarios under which this assumption could lead to less than "optimal" results in retirement planning. For example, one spouse may do quite well financially but be forced into untimely "retirement" due to illness. Another scenario, especially in the United States and other countries with similar medical plans for retirees, occurs when spouses vary quite a bit in age. One of the spouses may be old enough to receive public medical benefits while the other is not. If the younger spouse receives medical benefits from his/her employer, s/he has a large incentive to continue to work until public medical benefits become available. This is especially true if the spouses prefer to maintain separate financial accounts. In such cases the older spouse may be able to "afford" to retire while the younger may not have the financial base to retire at the same time.

In response to this reasoning, James has added a field to ORP's input form for a spousal retirement year separate from the retiree's and allows the contributions to continue to flow accordingly. It is possible that one spouse will be contributing to her 401k while the other is withdrawing from his IRA. Early trials indicate that this may not have a significant effect on the long-term outcomes. However, it brings the model into closer conformity to some real cases, which is always a good thing. James observes, "The three big exogenous factors in retirement planning are 1) Asset Returns, 2) Inflation, and 3) Personal Income taxes, not necessarily in that order. Everything else pales in comparison."

If such a scenario seems like it might apply to your family, try it in the Optimal Retirement Planner. You will gain the peace of mind that comes from the most accurate means of dealing with differing retirement ages.


Categories: Personal and Family Finances

Tags: optimal retirement planner, retirement planner, Retirement Planning

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