One of the most difficult aspects of retirement planning for many married couples is discussing what life might look like when one of them passes and the other is left alone.
Loving couples, of course, prefer to focus on how they’ll spend their retirement together — enjoying their homes, their hobbies, their families and friends. But failing to plan for the death of a spouse and how it might affect the survivor — emotionally, physically and financially — could have serious consequences.
Many of the strategic choices that will help make life easier for a surviving spouse can (and should) be made as early as possible in the planning process. Delaying only increases the chances that important planning opportunities could be missed, and the widowed spouse may be left to make critical decisions during what can be an incredibly difficult and stressful time.
Any retirement planning that doesn’t include transitioning to widowhood really isn’t complete. If you haven’t touched on this topic yet with your spouse and your financial adviser, some points to consider include:
1. Do you have a plan for replacing lost income?
Some expenses may be reduced, but it’s unlikely the surviving spouse’s overall costs will be cut in half. A 20% reduction is more realistic; and if it’s necessary to hire help, the surviving spouse’s cost of living could actually go up.
With that in mind, here’s something every married couple needs to know: If both spouses have claimed their Social Security benefits and one spouse dies, the lower of the couple’s two Social Security checks will automatically go away — and the surviving spouse will be left to manage with only the higher benefit amount. (For example, if one spouse was receiving $2,000 a month and the other got $1,500, the surviving spouse would receive only $2,000 going forward.)
This is why understanding Social Security claiming strategies can be so valuable — especially if you expect your benefits will be a major source of income in retirement. There are many strategies couples can use to maximize the benefit the surviving spouse will receive, but they all require planning.
You’ll also have a choice to make if you expect to benefit from an employer’s workplace pension.
When you (or your spouse) retire, you’ll likely be asked to choose the type of benefit you want — a single life benefit or a joint and survivor benefit. With a joint and survivor benefit, the monthly payments are typically lower, but they are guaranteed to continue for the surviving spouse. So again, if this is a significant income stream, you’ll want to be cautious with your decision.
2. Is life insurance part of your overall plan?
Life insurance can be an important part of a couple’s income replacement strategy. But finding and purchasing the right policy is just a start. It’s also wise to have a strategy for how you’ll keep the money from the insurance payout safely invested after you receive it.
If, for example, as the surviving spouse, you dump the entire amount in the market and there is a big correction, that money may not be there when you need it to pay bills or as a legacy for your family. On the other hand, if you play it too safe, the money may not grow at a pace you’ll need to keep up with inflation or to help with extra expenses you may have as you age.
Your insurance payout strategy should be based on a few different factors, including your age and life expectancy when you’re widowed and your financial goals at that time. But it can be helpful to have a proactive plan to protect the surviving spouse with a lump sum payout that is tax-free.
3. Do you have a will, a power of attorney and a health care power of attorney?
This is a piece of the retirement puzzle many younger retirees overlook, but it can be a real headache to deal with if it’s left undone.
It’s a good idea to talk to your financial adviser and/or an estate attorney about the benefits of a durable power of attorney, which could remain in effect after incapacity, depending on the laws of your state. You also may want to consider a trust, to further guard your assets. And don’t forget to review and update the beneficiaries you have listed on your various assets every year or after important life events.
4. Do you have a plan for the funds left in a 401(k) or similar retirement account?
The options may vary depending on the type of retirement account you inherit (traditional vs. Roth), your age and whether your spouse was already taking required minimum distributions (RMDs).
Inheriting a deceased spouse’s 401(k) or IRA isn’t necessarily a taxable event. But you will have to make some decisions rather quickly about what you want to do with those funds. So again, it can be helpful to have a course of action in mind.
5. What will you do with your free time when you’re alone?
This topic isn’t as measurable as the others mentioned above, but it may be just as meaningful to the surviving spouse’s overall happiness.
Sometimes, retired couples — especially those who are older — can become isolated and increasingly dependent on each other. Then, in many cases, the surviving spouse is left without a social circle or a support system.
Conversations about where you might want to live, what hobbies you might choose to pursue and who would take care of you when you’re alone can be another vital part of planning for widowhood.
6. Who will guide you through your decision-making?
Even if you and your spouse have been successful do-it-yourselfers with your financial planning for years, you should consider who will guide and advise you as you age — or when one of you is left alone. You may want to engage a financial adviser now so that person or firm can become familiar with your family and your finances before the need is urgent. It also can be helpful to have an adviser you feel comfortable with walk you through any uncomfortable conversations about death and widowhood.
Losing a spouse can be difficult enough without having to make any sudden decisions about your finances or lifestyle. Preparing now can help you avoid that stress in the future and allow you to confidently focus on the more appealing aspects of growing old together.
Editor's note: This story has been updated to clarify information about durable power of attorney.
Kim Franke-Folstad contributed to this article.
Appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Insurance products are offered through the insurance business Freedom Financial Group. Freedom Financial Group is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. AEWM does not offer insurance products. The insurance products offered by Freedom Financial Group are not subject to Investment Advisor requirements.
This is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions nor should it be construed as advice designed to meet the particular needs of an individual’s situation.
Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 2005469- 10/23.
Tyler Hill is an Investment Adviser Representative at Freedom Financial Group . She earned a bachelor’s degree in finance at Auburn University and has passed the Series 65 securities exam; she also holds a life and health insurance license. Tyler has more than a decade of experience in financial services and has been an Investment Adviser Representative for the past three years. She brings her retirement planning skills to work every day, building strategies for client families and helping them stay on track with their goals.
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