7 Myths About Marriage and Retirement

19 05 2009
7 Myths About Marriage and Retirement
by Kimberly Palmer
Wednesday, April 15, 2009

Think married couples have it easy? Or that you should get your pension policy to pay out as much as possible, as soon as possible? Well, think again. Predicting that you’ll die too early–or too late–can leave you and your spouse in a financial crunch. New research upends these 7 common myths about marriage and retirement:

Single people need less money. It’s true that that single people spend less money each year than couples, but at all ages over 65, they spend more of their income than couples do, according to research by Michael Hurd, senior economist at Rand. Then, after age 65, single people’s income goes down by three percent a year until it dwindles to 20 percent of its starting value at age 95. (For those at age 65, the probability of surviving to age 95 is around 11 percent.) Couples, meanwhile, maintain their income until the oldest member reaches age 79, when wealth starts to decline at around 3 percent a year. (On average, couples start out with three times the wealth of single people.) So while single people may need less money, they also tend to be less prepared for retirement and spend down their savings much more quickly. (Hurd’s calculations are based on data from the University of Michigan Health and Retirement Study.)

Married couples have less to worry about. While married couples do tend to enter retirement with greater resources than their single peers, there is a small chance that both members of the couple will survive to old age. According to Hurd, at age 65, the chances that both survive to age 77 is less than half. Once one spouse dies, the surviving spouse tends to spend down their joint wealth much more quickly. By age 95, on average the surviving spouse has just 32 percent of the couple’s initial level of wealth.

The worst case scenario is unlikely to happen. A recent survey by AARP Financial found that many people find themselves financially unprepared when the worst case scenario does strike, which compounds the tragedy. The survey, which focused on adults between ages 40 and 79, found that most (57 percent) had already experienced such a crisis, including long-term job loss, divorce, and death of a spouse or partner. Of those who lost a spouse, 63 percent said it had a significant impact on their finances.

Women are especially likely to be widowed, and to run into money problems once they are. According to the Census Bureau, more than 1 in 4 women over age 55 are widows; the proportion rises to two in three for women who are 75 and older. Divorce is another risk factor: While 12 percent of all women over age 65 live in poverty, the rate for divorced women is 21 percent, according to the Government Accountability Office.

Thinking you’ll die young–or live forever. Deciding how much to save and spend depends partly on how long you plan to live, a prediction many people get wrong. According to Hurd’s research, between ages 65 and 69, people tend to think they’ll die sooner than they actually will, which puts them at risk for over-spending. Then, over age 75, people tend to think they’ll live longer than they will, which means they may be overly frugal. Women tend to underestimate their chances of living longer compared to men. Between ages 65 to 69, women tend to underestimate their chances of survival by 12 percentage points compared to men’s four, Hurd says.

Getting as much money as possible, as early as possible, is best. Many people make the mistake of opting for higher payments from pension or other benefits payments during their lifetimes, which means their surviving spouses are left with less later. Mary McGrath, executive vice president at Cozad Asset Management, a financial planning firm in Champaign, Ill., says even couples with other assets should consider selecting an option that allows benefit payments to the surviving spouse after death, because suddenly losing all income adds unnecessary stress to the grieving process. “It’s too upsetting to the survivor to have all of the income cease when you die,” she says.

High-earners have less to worry about. While people who earn above-average income during their working lives tend to have acquired more resources than those who earn less, they also need more money in retirement in order to maintain their lifestyle. Hurd adds that another challenge for wealthier individuals is that they pay much heftier taxes, a factor many people forget to take into account.

Retirees should maintain their wealth until age 100. You can’t go wrong saving too much, but Hurd says it’s reasonable to look at more realistic survival rates. He defines a household as “adequately prepared” for retirement if it has a five percent or less chance of outliving its resources if it reduced its initial spending by 15 percent. By that definition, 83 percent of couples and 70 percent of single people are prepared.

Annuities are too expensive. Hurd says that more people should consider annuities as a way to ensure they maintain their wealth as they age. Annuities, or contracts with insurance companies that allow consumers to purchase a guaranteed income stream, tend to be under-used because people hesitate to pay a large lump sum now for a payout much later. “In my view, individuals are likely distrustful that the annuity will be there in 25 or 30 years when it is needed,” says Hurd. But, he adds, “even partial annuitization would reduce the burden of managing the level of spending and the portfolio.”

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