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How to plan for retirement when only one spouse works

Sakege November 12, 2024

Today, it is not uncommon for the spouse with the highest earning potential to financially support the family while the other spouse stays home to manage the household.

Although this arrangement may work well for parenting or elderly care responsibilities In the short term, it may present a long-term retirement income planning risk for the non-working spouse. To mitigate this risk, it is essential that both spouses are informed and actively participate in retirement planning decisions.

Understanding spousal rights related to retirement planning is a key step in ensuring the financial security of the non-working spouse.

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Pension Decisions for Married Couples

in a traditional pension planA worker is usually entitled to a normal benefit, payable throughout his life and equal to a percentage of his final salary, assuming he meets certain working and retirement age requirements. For example, a plan might provide that a participant will receive 50% of his or her final salary for life, provided he or she works for 30 years and retires at age 65.

However, when the participant is married, federal law generally requires that the pension be paid as qualified joint and survivor annuity (QJSA), unless the non-working spouse agrees to a different arrangement. A QJSA ensures that the pension continues to be paid to the surviving spouse after the participant’s death, usually at a reduced rate.

For example, Joe, who retires at age 65 with a final salary of $100,000, may be entitled to an annual benefit of $50,000 for his lifetime. If you choose a QJSA with a 50% survivor benefit, you could receive $45,000 annually for your lifetime, and $22,500 would continue to your wife, Mary, if you predecease her. The couple can also opt for a higher survivor benefit, although this will further reduce the amount of the initial pension.

It is essential that both spouses understand the implications of these decisions. Selecting a QJSA may mean receiving a smaller benefit during your joint life, but it can help provide financial protection to the surviving spouse.

A spousal IRA is another valuable tool for a non-working spouse. Even without income of his own, the non-working spouse can contribute to an IRAas long as the couple files a joint tax return. Over time, consistent contributions to a spousal IRA can become an important source of retirement income, helping to ensure financial independence.

For example, in 2024, Mary (age 45) and Mike (age 50) file a joint federal income tax return. Mary wins $100,000, while Mike stays home to take care of his sick parents. Mary can contribute $7,000 to her IRA (or Roth IRA), and Mike can also contribute up to $8,000 to his IRA, thanks to spousal IRA rules. Since Mike is at least age 50, he is allowed the catch-up provision above the traditional IRA contribution limit.

If you file a joint federal income tax return, your eligibility to contribute is based on your combined modified adjusted gross income (MAGI), allowing a non-working spouse to contribute to a traditional IRA or Roth IRA even without personal income, if the combined MAGI return falls within the allowable income thresholds. In 2024, for married couples filing jointly, you can contribute the full $7,000 if your MAGI is less than $230,000. If your MAGI is between $230,000 and $240,000, your ability to contribute or deduct is gradually reduced. If either spouse is over age 50, they can contribute an additional $1,000 as a catch-up contribution, bringing the total to $8,000.

Qualified Domestic Relations Orders (QDRO)

While everyone hopes for a long-lasting marriage, it is essential for both parties to consider how retirement assets will be divided in the event of a divorce, especially for a spouse with little or no money. retirement savings. Under federal law, retirement plan benefits generally cannot be assigned to anyone other than the participant except through a qualified domestic relations order (QDRO). This legal document allows a non-working spouse to claim a portion of the participant’s retirement benefits in the event of a divorce.

For example, a QDRO could allocate a portion of a 401(k) or pension plan to the non-working spouse. Given the complexities of divide retirement benefits in case of divorceParticularly with defined benefit plans, it is crucial to consult with an experienced attorney who can draft a QDRO that addresses important issues such as survivor benefits and plan subsidies during or after the divorce process.

How to Guarantee Retirement Income for a Non-Working Spouse

To help ensure your non-working spouse is financially secure in retirement, consider taking the following steps:

Review pension plan options together. Sit down as a couple and carefully review your pension plan options, particularly the Qualified Joint and Survivor Annuity (QJSA). Make sure both spouses understand the implications of each option and choose the one that best secures the financial future of the non-working spouse.

Establish a spousal IRA. If you are a non-working spouse, be sure to establish and contribute to a spousal IRA (traditional or Roth, if you qualify). Even small, regular contributions can grow over time and provide a significant source of retirement income, improving your financial independence.

Create a QDRO in case of divorce. If divorce is possible, be sure to work with an experienced attorney to draft a QDRO. This legal document will protect your rights to your spouse’s retirement benefits and ensure that you receive your fair share.

Consult with a financial advisor. Involve a fi financial advise my r who will provide personalized advice and make complex decisions, such as pension selections, spousal IRAs, and retirement income strategies.

Stay informed and involved. Periodically review your family’s financial situation, accounts and retirement plans. Attend meetings with financial advisors together to ensure that both spouses are equally informed about the decisions being made. Being proactive and involved will help everyone feel safe and prepared for the future.

This could be one of the most important financial decisions you will make as a couple, and making sure both spouses are informed is essential for a comfortable, stress-free retirement.

This article was written and presents the opinions of our contributing advisor, not Kiplinger’s editorial staff. You can check the advisor’s records with the SECOND or with FINRA.

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