NEW YORK -- The typical American family reflected in iconic television shows of the 1950s and 1960s, in which the husband went off to work each morning and the wife happily played out the role of homemaker, is firmly in the minority.
By 2012, the Bureau of Labor Statistics reported that six in 10 families with children have two working parents. What's more, the majority of Americans feel they need dual incomes in order to reach their financial goals.1
For a major goal like retirement, working couples need to be especially vigilant to coordinate their planning efforts in a way that supports their combined accumulation objectives. As you and your spouse execute your joint retirement strategy, keep some of the following tips in mind.
Couples nearing retirement need to decide the timing of retirement account distributions in light of their income needs, tax situation and market dynamics. Among the issues to consider are:
- Tapping taxable and tax-deferred accounts. Conventional wisdom suggests that tapping taxable accounts first enables your tax-deferred accounts to continue compounding longer – and potentially growing larger – over time.
However, there are also those who argue that waiting longer to tap tax-deferred accounts could result in larger required minimum distributions.
Converting a traditional IRA to a Roth IRA, allowing you to put off distributions as long as possible and/or receive tax-free income.3 If one or both spouses are covered by a defined contribution (DC) and/or a defined benefit (DB) pension plan, you will typically be given several pay-out options to consider. These may include:
- A single life or joint life annuity – Typically the distribution method of choice for DB plans, a single life option, pays out a fixed benefit for your lifetime; the joint life option continues paying some portion of the benefit upon death to another party, typically the surviving spouse. DC plans may also offer the option to annuitize, convert all or a portion of the account balance to a guaranteed stream of income for life.
- A lump-sum payment – Typically an option for both DB and DC plans, in which the full value of the account is paid out upon retirement. It is up to you to then decide whether and how to reinvest the proceeds.
You can begin receiving Social Security payments as early as 62, although delaying the election increases the monthly total. Married couples may want to consider first tapping one spouse's benefit and delaying the other one’s until age 70, which maximizes the income and may substantially increase the couple's total Social Security payout over a lifetime. Determining when and how to claim Social Security benefits is a complex matter involving many variables.
1 Forbes, "4 Dual-Income Households Tell All: How We Save and Spend," November 4, 2013.
2 If an individual has more than one IRA, the limits apply to the total contributions made in the aggregate to all the Traditional and Roth IRAs an individual owns.
3 A Roth Conversion may not be right for everyone. There are a number of factors taxpayers should consider before converting, including (but not limited to) whether or not the cost of paying taxes today outweighs the benefit of income tax-free Qualified Distributions in the future. A 10% penalty tax will apply on funds converted to a Roth IRA, if those funds are withdrawn before five years have elapsed unless the owner is age 59 ½ or another exception applies. Before converting, taxpayers should consult their tax and legal advisors based on their specific facts and circumstances.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
If you’d like to learn more, please contact Julia A. Peloso-Barnes , CFP®, CPM®, ADPA®, CPRC®
Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.
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