My Comments: I’ve written life insurance policies on men, women and sometimes children for over 40 years. In almost every instance, objectivity was hard to come by. The idea of death is difficult to talk about, especially when it’s about your death, or those you love.
As I’ve aged and come to terms with my eventual demise, and that of my spouse of 48 years this month, figuring out how to make the transition easier for everyone requires you to come up with a strategic goal and then take steps to make it achievable.
These words from Bob Carlson bring to light an overlooked problem, one that needs to be discussed before they can’t be discussed. If you know what I mean.
by Bob Carlson \ Forbes \ December 15, 2018
Many retirement plans don’t cover one of the events most likely to occur during retirement. The failure to properly plan for this event diminishes the quality of life in retirement and causes many plans to fail, because the financial consequences often are significant.
Most retirement plans fail to account for likelihood that one spouse will pass away and the other will live alone. It doesn’t matter which spouse is the survivor. Widowhood is likely to happen and will trigger a range of financial changes.
Women are most likely to be the surviving spouse simply because on average women live longer than men. About two in three married women are widowed after age 64, according to a study conducted for Merrill Lynch by Age Wave. The study estimated there are 20 million widows in the U.S. and 1.4 million a newly-widowed annually. Of course, many men are widowers as well.
Some consequences of widowhood apply to all families.
One Social Security check will disappear. After a spouse dies, the surviving spouse is entitled to the higher of his or her own earned retirement benefits and a survivor’s benefit based on the deceased spouse’s earnings history. In most cases the effect is that the surviving spouse receives the higher of the two benefits the couple was receiving when both were alive.
Other retirement income might be reduced or eliminated. When the deceased spouse was receiving a pension or annuity payments, the amount of income that continues to the surviving spouse depends on the payment type the deceased spouse had selected. If the deceased spouse elected a “life only” payment, the income ends on that spouse’s death. The full payment will continue to the surviving spouse if the “life and 100% survivor” benefit was selected. Other options continue a reduced income payment to the surviving spouse.
Some expenses are likely to increase. The surviving spouse is unlikely to be able to take over all the household responsibilities the deceased spouse had. In that case, someone often must be compensated to perform the tasks.
The exact tasks vary from couple to couple, so the cost to the survivor also will vary. The tasks might include most of the home and auto maintenance, cooking, cleaning, financial management, laundry, and more.
Medicare premiums could increase. Of course, the premiums for the deceased spouse no longer have to be paid. But the surviving spouse is more likely to pay the Medicare surtax for higher income individuals and couples. For married couples the surtax isn’t triggered until adjusted gross income exceeds $170,000. For single taxpayers, the surtax kicks in after $85,000. If the surviving spouse’s income isn’t significantly less than the couple’s income was, the surviving might owe the surtax.
Income taxes also could increase. The standard deduction for a married couple is $24,400 in 2019 while for unmarried taxpayers it is $12,200. Social Security benefits of a married couple are included in gross income when adjusted gross income exceeds $32,000, but for unmarried taxpayers the taxes are triggered at $25,000. The list of tax code provisions that differ this way for married couples and unmarried taxpayers is extensive.
The surviving spouse will have a wide range of decisions to make in the future. Some will relate to the death of the other spouse, but others are regular decisions that would have occurred anyway. Examples are the choice of a Medicare plan, investment decisions, home repairs, purchases of new cars, and more.
A widowed retiree no longer has a spouse to help with these decisions or act as a sounding board. It’s unfortunate but true that in most couples one spouse takes the lead in making some decisions. When that spouse passes away, the surviving spouse is likely to need help making these decisions and might have little or no memory of how and why past decisions were made.
Most often the concern is the surviving spouse might be left in a difficult financial situation because of lower income and higher expenses.
Yet, a surviving spouse who is left with financial security and significant wealth also could end in a difficult situation. Too often, the surviving spouse isn’t emotionally or intellectually prepared to deal with responsibility for sudden wealth. The consequences from trying to learn what to do could be extremely negative.
The surviving spouse might make investment and other financial decisions solo. The results could be poor. Or the surviving spouse might seek a financial adviser without the background to discern a quality adviser from an incompetent or criminal one. The inheritance might disappear and leave the surviving spouse in financial distress.
An essential element of a retirement plan for a married couple includes the period when one spouse is living alone. The period might short, in which case the financial consequences might not be significant. But one spouse might be living alone for decades, which changes the plan considerably.
Married couples need to consider that either spouse might predecease the other and consider how the plan should change. How would income change? Which expenses are likely to increase? Will the survivor be able and willing to live in the marital home? If no, where is he or she likely to move?
A major consideration is who will manage investments and help with other financial decisions. Older couples should consider using a financial adviser even when they’re doing well without one, because cognitive functions decline as we age. You want to try out an adviser and have him or her become familiar with your finances before there’s an urgent need. That also ensures that after one spouse passes away there will be continuity of management.
Some of the consequences of widowhood apply to all families, while other consequences depend on the circumstances.
Bob Carlson is the editor of Retirement Watch.