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Dolf Dunn Wealth Management, LLCDolf Dunn, CPA/PFS,CFP®,CPWA®,CDFA
Private Wealth Manager11330 Vanstory Drive
Suite 101Huntersville, NC 28078
Counting on Your Husband's Retirement Income? ThreeThings Women Should Know
December 17, 2012
Women face special challenges when planning forretirement. According to the Department of Labor,1women are more likely than men to work in part-timejobs that don't qualify for a retirement plan. Andwomen are more likely to interrupt their careers (orstay out of the workforce altogether) to raise childrenor take care of other family members. As a result,women generally work fewer years and save less,leaving many to rely on their husbands' savings andbenefits to carry them both through retirement.
But this reliance creates risk--risk of divorce, risk thatretirement funds won't be adequate to last twolifetimes (a risk that falls disproportionately onwomen, who outlive men on average by five years),2and risk of bad retirement payout decisions. Here arethree things you should know if you're relying on yourhusband's savings to carry you through retirement.
Qualified joint and survivor annuitiesIf your husband is covered by a traditional pensionplan at work, one of the most important retirementdecisions the two of you may make is whether toreceive his pension benefit as a "qualified joint andsurvivor annuity" (QJSA). While the term soundscomplicated, the concept is simple: should you elect abenefit that pays a higher amount while you're bothalive and ends when your husband dies (a single lifeannuity), or a benefit that pays a smaller amountduring your joint lives but continues (in whole or inpart) to you if your husband dies first (a QJSA)?
In order to fully understand your choices, it may helpto first go over how a traditional pension plan works.Typically, you're entitled to a "normal benefit,"payable for your lifetime and equal to a percent ofyour final pay, if you work for a certain number ofyears and retire at a certain date. A plan might saythat you'll get 50% of your final pay for life if you work30 years and retire at age 65. If you work fewer years,your benefit will be less. If you retire earlier than age65, your benefit will also be less, because it's paid fora longer period of time.
For example, assume Joe is covered by a pension
plan at work, and his plan contains the exact formuladescribed above. Joe retires at age 65. He's worked30 years, and his final pay was $100,000. He'sentitled to a normal benefit of $50,000 per year,payable over his lifetime and ending at his death (asingle life annuity).
But in order to protect spouses, federal law generallyprovides that if Joe is married, the plan can't pay thisbenefit to Joe as a single life annuity unless hisspouse, Mary, agrees. Instead, the benefit must bepaid over Joe and Mary's joint lives, with at least 50%of that benefit continuing to Mary for her remaininglifetime if she survives Joe. (That's why it's called a"joint and survivor annuity;" and it's "qualified"because it meets the requirements of federallaw--"QJSA" for short.)
Now, here's where it gets a little complicated.Because the QJSA benefit is potentially paid for alonger period of time--over two lifetimes instead ofone--Joe's "normal benefit" will typically be reduced.Actuaries determine the exact amount of thereduction based on your life expectancies, but let'sassume that Joe's benefit, if paid as a QJSA with 50%continuing to Mary after Joe's death, is reduced to$45,000. This amount will be paid until Joe dies. Andif Mary survives Joe, then $22,500 per year is paid toher until she dies. But if Mary dies first, the pensionends at Joe's death, and nothing further is paid.
The plan will usually offer the option to have morethan 50% continue to you after your spouse dies. Forexample, you may be able to elect a 75% or 100%QJSA. However, the larger the survivor annuity youselect, the smaller the benefit you'll receive duringyour joint lives. So, for example, if 100% continuesafter Joe's death, then the payment to Joe might nowbe reduced to $40,000 (but $40,000 will continue tobe paid after Joe's death to Mary if she survives him).
You can rest assured that the QJSA option will be atleast as valuable as any other optional form of benefitavailable to you--this is required by federal law. Insome cases, it will be even more valuable than the
According to theDepartment of Labor,1women are more likelythan men to work inpart-time jobs that don'tqualify for a retirementplan. And women aremore likely to interrupttheir careers (or stay outof the workforcealtogether) to raisechildren or take care ofother family members. Asa result, women generallywork fewer years andsave less, leaving manyto rely on theirhusbands' savings andbenefits to carry themboth through retirement.
Page 1 of 2, see disclaimer on final page
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for anyindividual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performancereferenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with aqualified tax advisor.
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other options, as employers often "subsidize" theQJSA. "Subsidizing" occurs when the plan doesn'treduce the benefit payable during your joint lives (orreduces it less than actuarially allowed). For example,a plan might provide that Joe's $50,000 normalbenefit won't be reduced at all if he and Mary elect the50% QJSA option, and that she'll receive the full$25,000 following Joe's death. It's important for you toknow whether your spouse's plan subsidizes theQJSA so that you can make an informed decisionabout which option to select. Other factors to considerare the health of you and your spouse, who's likely tolive longer, and how much other income you expect tohave available if you survive your spouse.
You'll receive an explanation of the QJSA from theplan prior to your spouse's retirement, which shouldinclude a discussion of the relative values of eachavailable payment option. Carefully read all materialsthe plan sends you. A QJSA may help assure thatyou don't outlive your retirement income--don't waiveyour rights unless you fully understand theconsequences. And don't be afraid to seek qualifiedprofessional advice, as this could be one of the mostimportant retirement decisions you'll make.
Qualified domestic relations ordersWhile we all hope our marriages will last forever,statistics tell us that about 50% of marriages in theUnited States will end in divorce.3 And since moremen are covered by retirement plans and have largerretirement plan balances,4 the issue of how thesebenefits will be handled in the event of a divorce isespecially critical for women who may have little or noretirement savings of their own. Under federal law,employer retirement plan benefits generally can't beassigned to someone else. However, one importantexception to this rule is for "qualified domesticrelations orders," commonly known as QDROs. If youand your spouse divorce, you can seek a state courtorder awarding you all or part of your spouse'sretirement plan benefit. Your spouse's plan is requiredto follow the terms of any order that meets the federalQDRO requirements.
For example, you could be awarded all or part of yourspouse's 401(k) plan benefit as of a certain date, orall or part of your spouse's pension plan benefit.There are several ways to divide benefits, so it's veryimportant to hire an attorney who has experiencenegotiating and drafting QDROs--especially fordefined benefit plans where the QDRO may need toaddress such items as survivor benefits, benefits
earned after the divorce, plan subsidies, COLAs, andother complex issues. (For example, a QDRO mayprovide that you will be treated as the survivingspouse for QJSA purposes, even if your spousesubsequently remarries.) The key takeaway here isthat these rules exist for your benefit. Be sure yourdivorce attorney is aware of them.
You can have your own IRAWhile it's obviously important for women to try tocontribute towards their own retirement, if you're anonworking spouse, your options are limited. Butthere is one tool you should know about. The"spousal IRA" rules may let you fund an individualretirement account even if you aren't working andhave no earnings. A spousal IRA is your ownaccount, in your own name--one that could becomean important source of retirement income with regularcontributions over time.
How does it work? Normally, to contribute to an IRA,you must have compensation at least equal to yourcontribution. But if you're married, file a joint federalincome tax return, and earn less than your spouse (ornothing at all), the amount you can contribute to yourown IRA isn't based on your individual income, it'sbased instead on the combined compensation of youand your spouse.
For example, Mary (age 50) and Joe (age 45) aremarried and file a joint federal income tax return for2013. Joe earned $100,000 in 2013 and Mary, athome taking care of ill parents, earned nothing for theyear. Joe contributes $5,500 to his IRA for 2013.Even though Mary has no compensation, she cancontribute up to $6,500 to an IRA for 2013 (thatincludes a $1,000 "catch-up" contribution), becauseJoe and Mary's combined compensation is at leastequal to their total contributions ($12,000).
The spousal IRA rules only determine how much youcan contribute to your IRA; it doesn't matter where themoney you use to fund your IRA actually comesfrom--you're not required to track the source of yourcontributions. And you don't need your spouse'sconsent to establish or fund your spousal IRA.
(The spousal IRA rules don't change any of the otherrules that generally apply to IRAs. You can contributeto a traditional IRA, a Roth IRA, or both. But you can'tmake regular contributions to a traditional IRA afteryou turn 70½. And your ability to make annualcontributions to a Roth IRA may be limited dependingon the amount of your combined income.)
Sources1 U.S. Department ofLabor, "Women andRetirement Savings,"(October 2008)2 The National VitalStatistics Report, Volume61, Number 6, October20123 The National Center forHealth Statistics, "Births,Marriages, Divorces, andDeaths: Provisional Data for2009 Table A"4 U.S. GovernmentAccountability Office,"Retirement Security,"(October 2007)
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