EDITOR'S NOTE: This article was originally published in the February 2009 issue of Kiplinger's Retirement Report. To subscribe, click here.
You can rarely go wrong with flowers or a candlelit dinner for a special occasion. But if you want to give your spouse a really nice gift, draw up a financial plan that will provide lifelong care for your significant other if you die first or become incapacitated.
Statistics show that it's likely the husband will die first. About 75% of those 85 and older are widows, according to the Women's Institute for a Secure Retirement. On average, the group adds, widowhood leads to a 20% decline in income, after adjusting for consumption needs. Widowers face financial challenges, too, of course.
You're probably thinking that your estate plan will take care of your spouse. That's a great start. But make sure you consider other safeguards, from possibly boosting Social Security survivor benefits to tutoring your spouse on the family's investments. And don't forget the flowers.
Pump Up Retirement Savings
Topping the gift list is a bigger nest egg. If you or your spouse, or both, are still working, try to hang in longer than planned. Besides adding to your 401(k) or IRA, additional work years could make you eligible for a larger pension and Social Security benefits.
A study by T. Rowe Price shows that a few extra work years can help a lot. By postponing retirement to age 65, from 62, you can increase your annual retirement income from investments by an inflation-adjusted 22%, assuming that you save 15% of your salary. (The study assumes that rather than starting to tap a $500,000 nest egg at age 62, you instead add about $15,000 a year to the pot, and that it grows at an average 6.7% a year.)
Also, postponing Social Security benefits will increase a retiree's income. Collecting benefits at 70, rather than at the early retirement age of 62, can boost the purchasing power of these benefits by 88%, the T. Rowe Price analysis found.
A delay will increase the survivor benefit, too. The lower-earning spouse, usually the wife, is entitled to a survivor benefit equal to her husband's benefit. But if a husband born between 1943 and 1954 claims at 62, he permanently reduces his benefits by 25% from what he would receive if he claimed at his full retirement age of 66. For each year he delays beyond 66, he'll get an 8% boost in benefits. "When a worker dies, the widow will get 100%. The bigger the benefit, the better," says Laurel Beedon, senior policy analyst at the women's institute.
That's what Wayne Huck, 66, figured when he decided to wait until 70 to claim his benefits. His wife, Mary, 64, recently applied for benefits based on her own much lower earnings. If Wayne dies first, Mary can switch to the higher survivor benefit. "This will give her a nice annuity if something happens to me down the road," says Huck, a certified public accountant in Wethersfield, Conn.
Until he collects his own benefit, Huck will collect a spousal benefit equal to 50% of Mary's. This strategy of restricting an application to spousal benefits works only when the higher-earning spouse has reached full retirement age. Once he turns 70, Huck will apply for his own benefit.
Besides maximizing Social Security payments, both spouses should take full advantage of tax-deferred accounts. If you're not both working, remember that a working spouse can invest in a spousal IRA for a nonworking husband or wife. The nonworking spouse can make a deductible contribution of up to $5,000 to a traditional or Roth IRA, plus an extra $1,000 if he or she is 50 or older.
Get Up to Speed on the Finances
In many marriages, one spouse takes the lead on investments and record keeping. If that spouse dies first or becomes incapacitated, the other is left scrambling to find documents and to figure out how much income is due from annuities and dividends. To avoid that, the person in control of the portfolio should review all investments with the other spouse.
It's also a good idea for spouses to write each other a "love letter" -- not the mushy kind, but a document that leaves instructions for the surviving spouse. The document could include everything from when to pay certain bills to funeral plans.