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I MARRIED CONNIE because she’s four years older than me. That meant our life expectancies would be similar and hence a survivor annuity would be less expensive.
I am, of course, joking. Sort of.
Providing for Connie, should I be the first to go, is among my top financial priorities. During my working years, I received far too many calls from new widows who had just learned their husband’s pension stopped when their husband died. Apparently, the husbands hadn’t bothered to mention this.
With traditional pension plans now relatively rare, at least among private sector workers, the days of worrying about a traditional survivor pension are all but over. Still, ensuring a surviving spouse has adequate income remains a crucial issue—and yet it’s one I rarely see discussed on the various blogs and Facebook groups I follow.
There’s a handful of ways to provide for a surviving spouse:
My strategy draws on the above ideas. When I die, Connie’s Social Security spousal benefit will disappear and be replaced with double the amount, thanks to the survivor benefit that’s equal to my current monthly Social Security amount.
Decades ago, we both naively purchased—or, more accurately, were sold—tax-deferred variable annuities. We stopped adding new money to these accounts many years ago, but their value continues to grow, and Connie will have that pool of savings available to her.
I have two pensions. Both are so-called joint-and-survivor. Assuming I die first, Connie will continue to receive monthly payments equal to 50% of one pension and 75% of the other.
She would also receive payouts from two life insurance policies. During my working years, I invested in group variable universal life insurance. Over the years, the investment fund accumulated and, when I retired, I converted to a paid-up policy. I also have employer-group insurance, for which I continue to pay a monthly premium. The payout on these two policies should provide Connie with about two years of living expenses.
My wife, of course, is the named beneficiary on my rollover IRA. Meanwhile, our taxable investments are jointly owned, and are structured to generate regular income. That includes taxable-bond interest, tax-free interest from municipal bonds, and dividends on two stocks.
Connie could dip into our portfolio to pay living expenses, but I’m hoping the portfolio stays intact for our children and grandchildren. How Connie will handle our portfolio concerns me—up until now she’s shown no interest in investing. In a letter of last instruction, I’ve explained where to go for assistance.
Sounds like your worth more dead, you better be careful.
Great article! My personal experience was similar. The unspoken assumption was I would be the first to go and I planned for my wife of 45 years, Dorothy, to have very few issues when I die. It did not happen that way. While I have moved forward, there has been an emotional cost in failing that unspoken assumption.
My personal letter of instruction has now ballooned due to things my children do not know. For example; Dorothy knew the location of the safe and the combination, the kids do not. The institutional knowledge is gone.
My condolences on losing your wife. Hang in there…
Richard: I have a very intelligent spouse of 50 years, come June. Her interest in finances, however, have never been less than they are currently. She knows what we have and she knows that if I were to not wake up tomorrow, she would never need to be concerned about income for life.
I waited until 70 to file for SS. We have 4 Deferred Annuities that will produce tax free income, since they were funded with Roth Dollars. (All are Joint & Survivor.). Each year I don’t “turn them on,” their income value increases by 8.25%. If we turn them on in 7 years, as planned, they will produce @$58,000 annually, again income tax free.
Like you, making sure my wife is provided for has always been a major responsibility in my mind. I am somewhat old school in that way. Although I no longer carry life insurance (other than paid funeral policies and a $10,000 policy provided by my college, when I retired,) one of the first actions I took when I got married in 1974 was to purchase life insurance.
I have written my wife a “final love letter,” which is updated as needed, monthly. It outlines all of our holdings, where they are, user names and passwords, and the names of those advisors who will be able to assist her after I am gone. In addition, there are funeral instructions and all the related information regarding our prepaid funeral arrangements. am four years older than my bride, and I have made it a point to hire advisors younger than we are.
In my “final love letter,” I have given her my thoughts and recommendations but also made it clear that after I am gone, everything is hers to do with as she chooses.
For decades I have advised clients and later in life my students that the day will come when “The Trifecta of Grief” will occur. 1. Your spouse will die 2. Your SS benefits will drop 3. Your tax classification will change to single. There is nothing you can do to avoid it, but you can prepare for it.
Hopefully everyone will do something similar to what I have done, since according to all the research, the vast majority of couples have one person managing the family finances, and if that person passes first, well…let’s just say it is not ideal.
Thanks for another great article.
My wife also has little to no interest in our finances other than having enough money to pay the bills on time. I have assured her that unless there is a worldwide financial Armageddon she should be financially set at least until she reaches 100. If there are financial issues after that I will be long gone and it will be up to her and our children to figure it out as I will be long gone based on my family’s life expectancy. Why at least 100? Well just this past month her mother moved into our house, leaving independent senior housing after turning 102 still without significant health issues.
I appreciate the effort the author has made to provide for his wife if he dies first. At the same time, I do wish his wife was more actively involved with the plan. That probably can’t start when couples are in their 7Os or 80s. And the phenomenon of the passive wife may be a leftover from the breadwinner/homemaker dichotomy. But the result may be less than optimal. I have several friends whose husbands provided well for them. Nonetheless, they have faced major problems ranging from paying monthly bills to managing large IRAs. And I totally agree with the writer belief who discussed the impact of taxes. That is a huge problem now and may get greater in the future.
Instructions include do nothing without tax advice, seeing a lawyer and contacting financial advisor. Our four children have copies to review now.
Thanks Richard for again sharing your thoughts and plans.
Whether its you or Connie that passes first the survivor will have to deal with the ugly tax effects of the change in tax filing status going from married filing jointly to single that will become effective in the tax year that follows the year the first spouse dies. In a nutshell the tax bracket ranges the survivor will have are compressed compared with MFJ and currently one half of the married filing jointly ranges.
For most people the federal taxation of their estates has become a moot issue as the higher exemption amount for estates eliminates any actual estate tax for assets left to non-spouses and the taxable estate deductible amount of assets left to the surviving spouse is (currently) unlimited. So much tax planning is rightly focused on the income tax impact on the surviving spouse.
I have bought and read Mike Piper’s 2022 book “After the Death of Your Spouse – Next Financial Steps for Surviving Spouses” which I believe is a good read to help plan and recommend reading it.
Like you, my planning actions are heavily influenced by the likely impact should I be the first to die spouse. Unlike you my spouse is four years younger however she also has mobility issues.
My current actions include working on improving my health through diet, exercise and getting adequate sleep so I will hopefully be present for longer for her.
For our longer period planning we have both started the process of converting some of our traditional IRA amounts above my RMD’s annually to Roth with the expectation that the tax rate will be less now as MFJ than later when my wife is single or if our children, as contingent beneficiaries, will prefer to inherit a tax free Roth vs. a traditional IRA when they are in a high marginal tax rate. I have also chosen to take my RMD’s early in the tax year to eliminate the burden to my spouse of having to immediately consider RMD requirements in the event I die in the later part of the tax year.
I do not live in a community property state and so I have thought about the impact of re titling of our property which would get a step up tax basis adjustment on the event of my death but currently our only real property is our home and the current IRC 121 home gain exclusion would eliminate any income tax for the surviving spouse. Your tax situation is different on your second home and with your wife’s mobility issue you may want to consider being the sole owner so if you die first she would then inherit the beach house with a tax basis that approximates the FMV and then she could sell the home without major income tax considerations.
Our non retirement financial assets are also owned jointly but that is primarily for the convenience for the surviving spouse. Those assets, for us, do not have a material unrealized gain that could benefit the surviving spouse. I would need to rethink the ownership of those taxable accounts if I had large unrealized gains and if I expected my spouse would need or want to liquidate them during her lifetime.
Typically tax-deferred annuities do not get a step-up in basis when death occurs and all of the accumulated income is taxable income when the income is paid out. Ugh! Usually there is not a good tax option and you are often deciding between the present value of the tax deferral vs. the future tax rate of the beneficiary when the annuity pays out. The worse case is typically when the annuity pays out and is taxed at the estate (1041 form) level where the maximum income tax rate of 37% plus the 3.8% NIIT are quickly reached compared to a human entity return. I do not have that financial issue but unless I expected the beneficiary to be in a low tax rate I think I would want to address that issue now. I have seen surviving spouses forced to take the entire balance of the inherited annuity as a lump sum and a large portion going to tax. Such income is taxed at ordinary tax rates and not capital gain rates.
Great article! Your comments along with other’s has inspired me to begin writing my own Letter of Last Instruction.
That alone makes writing this worthwhile.
Richard, Thank You. I always appreciate every article you write because of their relevance, simplicity, and relatability.
I’ve commented before that I retired from my full time vocation almost fifteen years ago and have worked part-time ever since. I chose to take the pension that doesn’t provide a partial pension to my wife if I “go” first and we have invested the $500 that my pension works have been reduced for all of those years. We also have other income coming in that she will have.
But the power in your message is that I have mentioned to her the financial plan for her when I pass but I have not written it down or regularly reviewed that plan with my Cindy or our children. The less she cares or understand financial things the more they need clarified
Thanks for your comment. Those final instructions can relieve a lot of stress for family.
About that $500. Another alternative is to buy life insurance with the amount a survivor benefit costs. The insurance is income tax free and with contingent beneficiaries the benefit will always be paid to someone, unlike a survivor annuity.
Thank you for your suggestions and insight
Dick, An invaluable resource for women is WISER—Women’s Institute For a Secure Retirement. https://wiserwomen.org written in an easy, understandable format to help women better understand retirement challenges. Perhaps you could sit down with your wife and go over it with her.
I fully understand your dilemma. On the bright side, you have provided Connie with enough sources of income so that she’ll never have to worry about money. Well done.
I’ll check out the resource, thanks.
Dick, great topic. You’ve written before about moving to your condo, and vacation home. Have you factored the into your “if I go first” plan? I remember working with my in-laws. My father in-law wanted to stay in their home till the end. He went first, and a year or two afterwards my mother-in-law was ready to downsize and moved to an independent living facility. I’ve seen this same dynamic in other couples, where the surviving spouse decides that their home is more than they want to deal with.
Rick, our move from our house of over 40 years to a condo nearby was part of the plan. Connie can’t do stairs and now it’s all one floor and no maintenance to worry about, plus the condo could accommodate care assistance if needed.
Many of the residents are widows and others have aids. The HOA fee gives a measure of expense predictability although far from total.
As far as the Cape house goes, very unlikely Connie could visit on her own. We have in our wills how it is to be handled upon both our deaths, but with a survivor we are leaving that flexible. Could be sold or even rented in the summer. Hopefully our children will use it. Selling would mean a significant tax bill I fear. Maintaining it either way has been figured into expenses.
The SS spousal benefit actually was the main reason Chris and I married after living in sin for about 15 years. I also prepared an inventory of all things money and review it with Chris at least annually. We’re lucky to have a competent financial advisor for a son-in-law who can take over managing the money if I die or become unable. And regarding pensions; before law required the spouse to sign off on the single life option, my uncle did that to my aunt.