What Households With a Stay-at-Home Spouse Need to Know About Retirement
Leisl L. Cording, CFP®
Senior Vice President & Financial Advisor
Married couples often decide together that one spouse should be the primary breadwinner while the other stays home to take care of family members.
Although this often works out well for childrearing or eldercare responsibilities in the short term, it can present long-term retirement-planning risks for the stay-at-home spouse – without any income, he or she may not have a retirement savings plan of their own, and his or her Social Security benefit will be greatly reduced as well.
So to Plan Well for retirement, stay-at-home spouses and married couples should be aware of the options available and decide the best way to ensure that both will have the means to live well throughout retirement. Here’s what to consider...
A stay-at-home spouse can have an IRA.
While it's obviously important for both spouses to try to contribute towards their own retirement, if you're a nonworking spouse, your options are limited. But there is one tool you should know about. The "spousal IRA" rules let a nonworking spouse fund an individual retirement account even with no earnings. With regular contributions over time, a spousal IRA could become an important source of retirement income.
How does it work? Normally, to contribute to an IRA, you must have compensation at least equal to your contribution. But if you're married, file a joint federal income tax return, and earn less than your spouse (or nothing at all), the amount you can contribute to your own IRA isn't based on your individual income; it's based instead on the combined compensation of you and your spouse.
The spousal IRA rules only determine how much you can contribute to your IRA; it doesn't matter where the money you use to fund your IRA actually comes from — you're not required to track the source of your contributions. And one spouse does not need the other's consent to establish or fund a spousal IRA.
If the working spouse has a pension, there are important decisions to make.
Typically, in a traditional pension plan, a worker is entitled to a "normal benefit," which is payable for his or her lifetime and equal to a percent of final pay, assuming the plan participant works for a certain number of years and retires at a certain date.
- To illustrate, let's assume Joe is covered by a pension plan at work, and his plan stipulates that Joe will get 50% of his final pay for life, given a 30- year work history and retirement at age 65. Joe’s final pay was $100,000, so he's entitled to a normal benefit of $50,000 per year, payable over his lifetime and ending at his death (a single life annuity).
- But in order to protect nonworking spouses, federal law generally provides for a qualified joint and survivor annuity, or QJSA, which stipulates that if Joe is married, the plan can't pay this benefit to Joe as a single life annuity unless his spouse, Mary, agrees. Instead, the benefit must be paid over Joe and Mary's joint lives, with at least 50% of the benefit continuing to Mary for her remaining lifetime if she survives Joe. However, because the benefit is potentially paid for a longer period of time — over two lifetimes instead of one — the participant's "normal benefit" will typically be reduced. Actuaries determine the exact amount of the reduction based on life expectancies.
A couple may choose to forego the QJSA feature as long as the spouse who is not the pension plan participant (in this case, Mary) signs off on the decision. But it’s important to note that sometimes employers "subsidize" the QJSA, in which case the plan doesn't reduce the benefit, or reduces it less than determined by the actuary – so it’s important to know if your plan is subsidized in order to make an informed decision about which option to select.
Basically, the question comes down to this: should you elect a benefit that pays a higher amount while both spouses are alive and ends when the participant dies (a single life annuity), or a benefit that pays a smaller amount during the joint lives of both spouses but continues (in whole or in part) to the surviving spouse after the participant's death (a QJSA)?
You'll receive an explanation of the QJSA from the plan prior to the participant's retirement, which should include a discussion of the relative values of each available payment option. Carefully read all materials — one spouse should not waive his or her rights without fully understanding the consequences. And don't be afraid to seek qualified professional advice, as this could be one of the most important retirement decisions you'll make as a couple.
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In the case of divorce, qualified domestic relations orders are an option.
While we all hope our marriages will last forever, that's not always the case. The issue of how retirement benefits will be handled in the event of a divorce is especially critical for spouses who may have little or no retirement savings of their own.
If a couple divorces, the stay-at-home spouse can seek a "qualified domestic relations order" (commonly known as a QDRO), a state court order awarding him or her all or part of their spouse's retirement plan benefit. The spouse's plan is required to follow the terms of any order that meets the federal QDRO requirements. There are several ways to divide benefits, and how they are divided can become complex. But the key takeaway here is that these rules do exist for the benefit of a nonworking or lower income-earning spouse.
Planning well to ensure you both Live Well in retirement requires action now.
It can be easy to keep delaying retirement planning decisions until another day, but taking action now can make all the difference down the road. There’s certainly a lot to consider and the many variables involved mean that there is no “one size fits all” plan. At Weiss, Hale & Zahansky Strategic Wealth Advisors, we can help you to create the best plan for you, using our strategic Plan Well, Invest Well, Live Well™ process. See how we can help you to create your own strategy for living well in retirement.
Presented by Vice President, Associate Financial Advisor Leisl L. Cording, CFP®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com (http://www.whzwealth.com). © 2021 Commonwealth Financial Network®
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