the easy path or the difficult path / illustration

This article appears in the November issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Couples with a significant age gap can present retirement planning challenges. Issues such as longevity risk, timing of pension benefits and estate planning require special attention for couples whose ages vary by more than five years.

“With couples with a large age gap, there’s a larger risk that the younger partner will, for a number of years, be on their own in terms of generating retirement income,” said Owen Winkelmolen, certified financial planner (CFP) and founder of in London, Ont. In other cases, the younger spouse might retire early — sometimes during their peak earning years — to maximize the time they can spend with their partner in retirement.

One of the most important decisions for these couples is to determine when each partner should begin receiving their Canada Pension Plan (CPP) benefits.

When partners are a similar age, CPP and old age security (OAS) typically begin at the same time. “Usually, there’s a lot of retirement income there,” Winkelmolen said. “But for couples with an age gap, that income halves” when only the older partner is drawing benefits.

A significant age gap means the older partner may need to draw more from investment accounts earlier on to compensate for the disparity, he said. In such scenarios, the younger partner also may need to take their CPP as soon as possible.

If the older spouse can afford to delay receiving CPP benefits, a greater survivor benefit may be provided to their spouse, said Brenda Hiscock, CFP with Objective Financial Partners Inc. in Markham, Ont. This consideration is particularly important in cases in which the younger partner will not be receiving the maximum CPP amount.

For couples whose younger partner will receive close to the maximum CPP amount and who don’t need that extra retirement income, Winkelmolen said he would recommend the younger spouse delay their benefits as long as possible. Doing so could extend the length of time the younger spouse could access their partner’s survivor benefit before it would be reduced. At that point, the younger spouse would transition to a higher personal CPP amount at age 70.

Timing RRIF drawdowns also becomes more complicated for age-gap couples, Winkelmolen said. These clients need to balance preserving enough funds for the younger partner to live comfortably after their spouse dies against the risk of not drawing down fast enough from the older partner’s account before their passing.

A scenario where the older partner dies and leaves behind a surplus of funds could result in a “monster RRIF where everything gets combined, and now it’s just one person drawing out all of that income in retirement,” Winkelmolen said.

The surviving spouse “might end up paying way more tax,” Winkelmolen explained, “because they can’t income-split with their [deceased] partner anymore.” The surviving spouse also could become subject to OAS clawback.

Therefore, couples with a large age gap could decide “to draw more from their RRIFs while alive to split their income,” he said.

If the primary concern is ensuring enough leftover RRIF funds for the younger partner, Hiscock said, one way to draw on those funds more slowly is to base the minimum withdrawal on the younger spouse’s age (see story). This could provide additional tax benefits for the older spouse.

If the older spouse has a defined-benefit pension plan that allows the clients to choose from various levels of survivor benefits, Winkelmolen said, increasing the survivor benefit from the usual 60% to 100% might be advantageous. Typically, such plans reduce the monthly benefit the plan member receives to accommodate the higher survivor benefit.

Critical illness insurance is even more important for these couples, Williams said. If the older spouse becomes ill during their retirement, they might otherwise have to withdraw significant funds from the family’s retirement pool to cover their health-related costs.

Hiscock also touted the utility of long-term care insurance in these cases. “You really want to make sure there are funds available to [cover] some kind of care,” she said. “What happens, and what I see in my practice regularly, is the caregiver becomes sick because they’re putting all their effort into [caring for their partner].”

Zainab Williams, financial advisor and founder of Elleverity Wealth Management in Milton, Ont., said couples with significant age gaps also face estate planning challenges. For example, the older partner might have had an established career and purchased their home on their own when the relationship began. The couple could be part of a blended family, which may require special accommodation in the couple’s wills. In those cases, clarity regarding how the assets will be divided upon the death of one or both partners is key, she said.

The age gap necessitates an honest conversation about what the younger partner’s life will look like after their spouse passes, Hiscock said. Will the survivor want to remain in the same house? What family and community support will they have around them? Will they have enough funds to cover their own care needs in retirement? Will they be comfortable managing the household finances on their own? And what if the younger spouse dies first? Longevity risk may be less of a challenge, but other matters, such as caregiving and managing the household, will have to be addressed.

“Having those conversations is one of the most difficult parts of it all,” Hiscock said. “No one wants to talk about [those things], but if you don’t there’s a lot of animosity and frustration.”