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After You Leave

Richard Quinn

VIEW ANY NUMBER of YouTube videos on retirement planning, and you’ll find advice on how much you need to save each month, how to invest, how much to accumulate and how to generate retirement income. The same is true for the experts who write blogs.

All this information relates to the retiree. Rarely—actually never—have I seen a discussion about survivor benefits. Even the 4% rule uses an assumed 30-year retirement period, apparently ignoring the possibility that retirement income needs to last over two lifetimes that may extend beyond 30 years, a distinct possibility if one partner is several years younger.

I’m sensitive to this issue because, during my working years, I received many calls from new widows asking about their survivor pension. Often, there was none because their husbands had selected to receive income only over their life, with no survivor benefit. Times have changed, of course. There are new laws to protect spouses, plus many couples have dual incomes. But at the same time, retirement is more the individual’s responsibility than ever before.

Given the reported dismal state  of retirement planning, I wonder if people are thinking about dual lifetimes. Couples should have detailed discussions about how much income there will be after the first spouse dies.

Does each spouse have their own income source? Are they drawing from a single pool of retirement assets? To what extent do they count on Social Security? What’s the age difference between the couple?

I have both a qualified and nonqualified pension. I selected a 50% joint-and-survivor annuity for one and 75% for the other, meaning my wife will receive half and three-quarters of these two pensions, should I die first. Opting for the survivor annuities reduced the monthly payout on the two pensions, but the reduction was worth the peace of mind. On top of that—and contrary to conventional wisdom about dropping coverage as you grow older—I maintain life insurance equal to about two years of expenses. My wife will also have access to our investments.

It’s all a bit conservative, I admit, but I don’t want my wife worrying about money, even if she should require long-term care, and I don’t want to create a financial burden for our children. Want to make sure a surviving spouse has enough money? Here are five pointers:

  • Plan on Social Security survivor benefits, but remember that—upon the death of the first spouse—your household’s total Social Security benefits could drop by a third or more.
  • Ensure accumulated assets are sufficient for two lifetimes, and perhaps longer than the often-assumed 30-year retirement.
  • When selecting pension coverage, choose the survivor option.
  • For additional lifetime income, consider using part of your retirement nest egg to purchase an immediate annuity that pays income over both of your lifetimes.
  • Purchase life insurance so the surviving spouse receives a lump sum upon the other spouse’s death.

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William Ross
William Ross
7 months ago

Won’t your IRMAA contributions fall, because one Medicare premium payer has passed away? They probably won’t decline by half, but they will decline.

R Quinn
R Quinn
7 months ago
Reply to  William Ross

That depends on the income of the survivor. My wife’s income could drop while her IRMAA premium increases significantly

Rick
Rick
7 months ago

An often overlooked issue on the death of the first spouse hits not on the income side but on the expense side. Specifically the Medicare IRMAA contributions. When the tax return transitions from married to single, the IRMAA contributions increase dramatically for the same income level. This is something to plan for.

R Quinn
R Quinn
7 months ago
Reply to  Rick

Excellent point. I overlooked that issue.

Rob Jennings
Rob Jennings
7 months ago

An alternative (or potential supplement) to an immediate annuity is a deferred annuity, including a QLAC which pays out as late as 85 and also reduces RMDs. We are considering a QLAC to address, in part, the survivor income (and tax..) question.

Dr Richard Ray Shreve
Dr Richard Ray Shreve
7 months ago

Kudos to you for covering several often missed points regarding the marriage survivor. There was an additional very important topic which was NOT addressed in this excellent document.
Yes I have a late in life second marriage of now 16 years with a spouse 14 years younger AND 4 adult well educated children. There is NO debt or payments of any type except property taxes/insurance. There are 2 homes without mortgages, several pensions(some with residuals or joint), a respectable social security monthly check, a respectable sized investment account, LTC policy for both, & a complete paid medical, dental & eye ware plan. Then a psychopath called Trump got in the way saying I can NOT leave any monetary instrument (think TRUST) to my children for over 10 years. In order to properly & ethically treat MY own children, I am now faced with reducing benefits to my spouse. This is NOT what I desire NOR in the long term best interest of MY family. I worked 69 years and this is my reward?
RR$, Ph.D.

Catherine
Catherine
7 months ago

Thanks for this important piece on survivor benefits, especially the pension percentage decision for your survivor on any defined benefit pension, as informed by a calculated cost of life insurance in lieu of reduction in the pension amount.
It’s not so simple as thinking one person can live on their prior income stream and assets that remain after a death, since it’s only one and not two.
I think most couples would benefit early on, when risk of either dying is very low, from a weekend of scenario planning regarding how the surviving spouse’s life would change financially. This should be planned both ways, regardless of the age difference. Once a couple has created a baseline model, they can revisit it periodically as their debts/assets change.
Especially, if a couple has any dependents (children, parents, siblings, you name it), it’s crucial to have this planning in place. Death arrives when it wills, not necessarily as expected. In the weeks and months that follows, a high quality preparation is one of the finest legacies we can offer those who are left to carry on.
Some are squeamish about death, don’t want to talk about it. Hopefully that’s never both members of a couple, and this should not preclude the one who wants to plan to strategize on their own, and let the other person be.
I appreciate your including the choices you have made in light of your own planning.

Rick Connor
Rick Connor
7 months ago

Great article Richard. You are dead on here (pun intended). I’ve heard many guy friends say they are want to spend early in retirement because they don’t expect to live long. When I ask them about their wives I get a blank stare. They hadn’t thought of it.

Thats why I think delaying SS, in certain cases, makes sense. I took the 75% J&S on my pension. If I maximize my SS the combined should cover her expenses.

Jeff
Jeff
7 months ago
Reply to  Rick Connor

That’s if you live long enough to reach 70. Delaying is not always the right answer.

William Perry
William Perry
7 months ago

I enjoyed the article and comments. Thanks. In my thinking I also like the thought that the planning life expectancy often used is an average and it is highly unlikely that my length of life outcome will result in my death on schedule. I like Dr. Kotlickoff’s thought that the appropriate planning period is the maximum life expectancy for both my wife and me. That has caused me to wait till age 70 to claim my social security benefit and to continue to work in my 70’s. Humble Dollar has a lot of great ideas to help me get where I want to be, I am not there yet.

John Yeigh
John Yeigh
7 months ago

Likewise, the tax rate for the surviving spouse filing as a single will increase.

Newsboy
Newsboy
7 months ago

“Even the 4% rule uses an assumed 30-year retirement period, apparently ignoring the possibility that retirement income needs to last over two lifetimes that may extend beyond 30 years…”

Dick, I think you’ve addressed the “elephant in the room” for many folks approaching retirement. I work with multiple clients where there is 10+ year difference in age between the spouses. Factor in life expectancy based on gender, and a compelling argument can be made that some retirement plans have major gaps when it come to addressing this actuarial reality.

Your remark on having some permanent life insurance (post-retirement) in an effort to provide a tax-free income bucket for your surviving spouse (referred to as “pension maximization”) is a strategy that often gets missed by those with defined benefit / pension plans (ideally, an option that’s analyzed while they are still in their early-to-mid-50’s, for cost reasons).

The monthly income spread between a “single life only” pension benefit versus the reduced “joint / survivor” monthly amount should be carefully reviewed to determine whether life insurance (if one is still reasonably healthy, or has term coverage with an option to convert to permanent life) can be employed (in tandem with taking the “single-life” pension option) to help close the income gap in a cost-effective manner. The math is admittedly a bit complex, but the strategy may help provide for a better income stream while both are still alive (via taking the bigger “single life” pension benefit), and later allow for sufficient income replacement (from life insurance proceeds) after the first spouse’s death.

Thanks for your insightful post!

Last edited 7 months ago by Newsboy
R Quinn
R Quinn
7 months ago
Reply to  Newsboy

Excellent point. When I conducted planning workshops we always discussed the amount of the pension reduction for a J&S versus what that amount could buy in life insurance. Obtaining the insurance as early as possible was the key to lower cost. And of course, unlike the survivor annuity the insurance will always go to someone and income tax free.

My pension had a pop-up provision so that if my beneficiary had died within five years of my retirement my pension would revert to a SLA.

My insurance is paid up so I make no premium payments.

Rick Connor
Rick Connor
7 months ago
Reply to  R Quinn

At my company I remember many of the senior engineers trying to decide to choose the life only with life insurance or 100% J&S. The difference was about a 14% reduction aim pension. Most of them concluded the life insurance was too expensive at their age, or hard to get. I wish I had learned from their experience and investigated it when I was younger and healthier.

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