Financial planning for couples with a large age-gap

According to research, large age-gap marriages have a greater chance of failing because each spouse is generally at a different life stage psychologically, emotionally, and financially. These complex family dynamics give rise to a special set of financial planning considerations which should be considered as early in the relationship as possible.

Risk cover

When it comes to risk cover, the age and health status of the older spouse may impact his insurability. If the older spouse wants to make financial provision for his younger spouse through a life policy, obtaining cover may be both challenging and expensive if he is significantly older. As part of the planning process, it is important to keep in mind that the older spouse’s disability cover could be reduced or come to an end between ages 60 and 70, and the couple should be aware of the risks if the older spouse intends to continue working beyond this age and where they are dependent on his income. If the older spouse has dependants and/or financial obligations as a result of a previous marriage or relationship combined with the desire to provide financially for his younger spouse, getting the structuring and beneficiary nomination on his life policies is an important consideration.

Estate planning

Where the older spouse has children and/or maintenance obligations from previous relationships, a careful estate planning process should be undertaken. The existence of a blended family and complex family dynamics can make estate planning tricky to navigate. Essentially, estate planning for couples with a large age gap is a fine balancing act between addressing the longevity issues and financial needs of the younger spouse while also ensuring that the financial needs of the older spouse’s children and/or dependants are catered for. That said, it is important to still prepare estate planning scenarios for each spouse and not just on the basis of the older spouse being the first dying. When it comes to making provision for loved ones, the older spouse may need to weigh up the pros and cons of leaving money in a retirement fund versus moving it into a living annuity structure, bearing in mind that the distribution of retirement fund money amongst financial dependants is governed by Section 37C of the Pension Funds Act, which could impact on the older spouse’s intentions to provide financially for the younger spouse. On the other hand, moving his retirement funds into a living annuity would allow the older spouse to nominate the younger spouse as the beneficiary to the investment. Another estate planning dynamic worth taking into account is the possibility that the older spouse develops dementia or Alzheimer’s disease which would result in the younger spouse having to take steps to ensure that she can manage her spouse’s affairs if and when he loses mental capacity.

Retirement planning

Retirement planning for couples with a wide age gap is more complex than in the case of similar-aged couples, not least because of the extended time horizon that needs to be planned for. The couple’s retirement horizon effectively spans from the day the older spouse retires to the day the younger spouse dies, and this can make retirement scenario planning and modelling somewhat challenging. Depending on the couple’s unique circumstances, planning for two vastly different retirement dates could entail developing two separate investment strategies based on each spouse’s timeline. This may make it easier to more accurately time the movement of invested capital from growth-orientated strategies to wealth-preservation strategies to ensure that the timing is appropriate for each spouse’s life stage.

The younger spouse should give careful thought to the consequences of retiring simultaneously with the older spouse as this could have far-reaching emotional and financial consequences. In the first instance, early retirement could mean that the younger spouse’s investments are held in a strategy that is too conservative for her needs and, as a result, she could miss out on important years of investment growth. At the same time, she would need to take into account the forfeiture of tax deductions on future retirement funding premiums, as well as the lost opportunity costs of future career prospects and future earnings which could have been invested for growth. Retiring too early could also affect the dynamics in the relationship, especially where the older spouse has accumulated the lion’s share of the wealth and has financial commitments to people outside of the marriage. Besides the financial consequences of retiring too early, the younger spouse should also consider that if the marriage fails or the older spouse dies, she could be left alone, unemployed and in an emotionally vulnerable position. In addition, she should consider the very real possibility that with an extended retirement, she could suffer from a lack of fulfilment, regret, boredom, and resentment.

Where the older spouse chooses to retire while the other spouse continues working, the couple will need to contemplate how to replace the lost income of the retired spouse without jeopardising their retirement capital. If the couple starts drawing down from their retirement funding too early, it could lead to a situation where the younger spouse is left underfunded for retirement. They will also need to consider what it will mean for their relationship where one spouse is building her career while the other spouse is seeking a slower, simpler existence.

Generally, speaking, base retirement forecasting for mixed-age couples should be done on the spouse with the longest life expectancy, while showing the couple what various retirement scenarios would look like. When making decisions to retire from a retirement fund and purchase an annuity income, consideration should be given to the couple’s unique circumstances, including the existence of discretionary investments, any large capital requirements, their desire to leave a financial legacy to their heirs, and their assumed longevity, amongst other things. From a planning perspective, it is hugely empowering to show the couple how delaying retirement even by a few years or increasing the number of working years will affect their retirement outcomes. Importantly, bearing in mind that the younger spouse is often a woman and that women tend to live around five years longer than men, both spouses should have full insight into their retirement planning – with the very real possibility that the younger spouse will need to manage the couple’s affairs later in life.

Healthcare planning

Generally speaking, healthcare costs increase with age which, on the positive side, may result in the medical costs of the two spouses being staggered. On the other hand, this may result in the younger spouse having to care for her older spouse while at the same time trying to hold down a career. As such, the costs of caring, frail care and nursing should be factored into the couple’s long-term care plan. The younger spouse should also consider how she would feel if they had to move into a retirement frail care facility for the benefit of her older spouse. Further, in the event of the older spouse’s death, the younger spouse may be left alone with no one to care for her in her old age. From a cost perspective, if the younger spouse enjoys a medical aid subsidy through her employer, it may make financial sense for the couple to join her employer’s medical aid scheme. The couple may also want to consider different medical aid plan options that are suited to their specific healthcare needs.

In general, couples don’t think about retirement early enough in the financial planning process. Having a wide age gap is even more reason to develop a retirement and estate plan that is customised for the unique needs of such a couple.

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