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Couples with age gaps face an uneven financial path

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It is never easy for couples to prepare solid financial ground for a prosperous retirement. But for spouses or partners with an age difference of 10 years or more, the challenges can be especially acute.

Not only do these couples face more complicated tax and retirement income calculations, but "obviously your time horizon would be considerably longer, and you have got to plan for a longer period," says Jamie Golombek, the Toronto-based managing director of tax and estate planning for CIBC Wealth Advisory Services.

These couples often choose – for lifestyle reasons, such as a desire to travel together in their golden years – to retire as closely together as possible. Typically in that situation the younger spouse will retire earlier, rather than the older partner working an extra 10 years.

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But there are financial consequences to that. Mr. Golombek notes that the much younger spouse would accumulate less in earnings over his or her lifetime. There will be less time for that money to compound before it is needed in retirement. And the money will need to last longer to cover more years.

"There is no magic bullet," says Tom McCallum, a chartered professional accountant and chartered business valuator based in Whitby, Ont. He explains that retirement and tax planning scenarios that work for one couple might not be right for another.

If, for example, the older spouse has a company pension plan, he or she might want to consider settling for a lesser pension amount covering a longer time period to encompass the expected lifespan of the younger partner, Mr. McCallum says.

A key general strategy is to ensure that a spousal registered retirement savings plan (RRSP) has been established and that contributions are regularly made by the higher income spouse to the partner. The higher income spouse can also help to maximize the partner's tax-free savings account (TFSA), with the goal in both situations being to minimize differences in income upon retirement, thus lowering their overall tax bill, Mr. McCallum says.

Another factor to keep in mind is that couples are entitled to split eligible pension income regardless of age, says Myron Knodel, director of tax and estate planning for Investors Group Financial Services Inc. in Winnipeg. "It doesn't necessarily start at 65," he says.

"Let's take an extreme example. You're someone who retires at 55 years of age, and you're entitled to a [company pension] and your spouse is 40. You can income-split. The 55-year-old who is getting that pension can split with the 40-year old spouse if they choose," Mr. Knodel says.

But "in situations where one is working and the other is not, and has a pension they are receiving, they would probably not want to pension-income-split during the years that the other spouse is working. When that other spouse ceases to work, then they would want to elect to do pension income-splitting, to try to equalize their incomes," he adds.

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Couples also have the opportunity to start collecting on their Canada Pension Plan (CPP) entitlements as early as age 60, with a reduction in payments, or they can delay receiving them until as late as age 70, with a premium. Partners roughly a decade apart in age can therefore start collecting CPP around the same time. Both must apply before they are entitled to split benefits.

Couples can also use non-registered investments such as mutual funds or stocks in their planning.

One strategy is to have the lower-income spouse keep all the money he or she earns and invest it in non-registered investments, and let the higher-income spouse use their salary to pay all the household expenses, suggests Mr. Golombek.

"The reason for that is that we want to leave as much money as possible in the hands of the lower-income spouse or partner," he explains, elaborating that this attempts to accumulate assets in the hands of the person expected to be in the lower tax bracket upon retirement. It also allows for annual investment income or capital gains from those investments to be taxed in the hands of the lower-income spouse both during the pre-retirement and retirement stages.

Couples might also face complex tax considerations, especially if one spouse owns a business that could be sold to fund retirement.

If, for example, the younger spouse owns a business but the older spouse is the higher income earner, making contributions to a spousal RRSP or TFSA might not be a good strategy because doing so could create a serious imbalance in incomes once the business is sold, explains Mr. McCallum.

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An entrepreneur who sells a qualifying small business to fund his or her retirement could also be eligible for up to $813,600 in an inflation-adjusted lifetime capital gains deduction in 2015, he adds. But a couple could use strategies that even out the impact of a business sale so that both spouses participate.

"If the business is still growing in value, you could do some kind of a freeze of your existing shares, and then bring your spouse in as a shareholder so that he or she can participate in future growth," says Mr. McCallum.

Mr. Golombek noted that some couples with a wide age gap might be in a second marriage, with children from a first marriage that also need to be looked after in estate planning.

"It's important to … find out whether there are more complicating issues that typically would arise when we see a couple with a large age difference," he stresses.

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