Making Sure the Surviving Spouse has Income

The National Association of Personal Financial Advisors was recently polled determine common surprises encountered by their clients planning for retirement. A Chicago Tribune article highlighted one of the most common responses from those advisors:  a failure to set aside significant income for a surviving spouse.

It is one thing to examine how long an individual is expected to live, subtract that from their current age, and determine how much is needed each of those years. By no means is this an exact science, but it is somewhat intuitive to roughly understand how much a single individual needs to retire. Things get more confusing, however, when spouses get thrown into the mix. As one planner interviewed for the article noted, "One thing people don't plan for is the reduction of income if a spouse or partner dies."

Think about Social Security. When two partners are alive, each may receive Social Security benefits. However, if one of the spouses dies, his or her income will disappear. Even taking into account a larger benefit for the surviving spouse, the overall family income will be lower than before. Similar problems can arise for those living off a pension. A spouse's death may cause the pension income to dry up. If not accounted for, this can thrown some seniors into a financial tailspin. One professional interviewed for the Chicago Tribune story told of a recent client whose retirement income dropped 35% following her husband's passing, but who found only a 10% decrease in expenses. This ultimately required a significant lifestyle change for the woman at the very moment when she craved stability following the loss.

Various tactics can be used to minimize the long-term consequences and provide more stability no matter what the future holds. For instance, a higher-earning spouse may choose to refrain from taking Social Security. This may earn him or her "delayed credits" up to 8% a year until the age of 70. If that spouse passes on, the surviving spouse may be able to switch to the value of the other's benefit, including delayed credits and cost-of-living adjustments. For pensions, a "joint and survivor annuity" might be appropriate, where less is paid out monthly for the peace of mind of knowing that income will continue even if the pensioner dies first.