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One of my pet issues is survivor income. Assuring a survivor, generally a spouse, is financially okay no matter what is very important IMO, but I rarely see it discussed on retirement planning sites.
I have many stories from my work experience where a spouse – typically the wife – was left floundering upon the husbands death because, except for Social Security, income ceased – these were people with the ability to select pension survivor annuities. The common excuse for not providing survivor benefits was they didn’t want to reduce the pension.
It’s different these days with few pensions and more dual incomes and savings, but I wonder how much consideration survivor income is given in planning, especially when there is a significant age difference. And, of course, someone other than a spouse may be dependent.
There are several ways to approach this risk. We use a combination of resources for Connie – who happens to be four years older.
Social Security, of course
My basic pension has a 50% survivor annuity
My supplement pension has a 75% survivor annuity (survivor benefits can also be provided through purchased annuities.)
There is whole life insurance equal to about two years living expenses- income tax free
Our investments generate interest and dividends – half tax free- about equal to the survivor Social Security benefit
Finally there are the investments themselves which can be used as necessary.
No doubt there are different strategies or combinations that can meet the need. Let’s hear your thoughts and concerns.
We didn’t have a pension so we partially annuitized our IRA such that with my SS benefit at FRA, that combined income would cover our essential expenses. I was able to wait to age 70 to claim SS. That lifetime income (my SS benefit plus joint-survivor immediate annuity) covers all expenses except for major travel. We treat my wife’s SS income as a future inflationary hedge for essential expenses or to supplement our discretionary spending. Since 2018 (when TCJA became effective), we have converted 40% of our portfolio to Roth as well. For a surviving spouse, the remaining SS benefit plus the annuity income still cover all essential expenses. The RMD (which is 40% less due to the prior conversions) is sufficient to cover any additional income needs. If needed, we can also further reduce the RMD by applying the annuity income toward “satisfying” some of the RMD based on the non-annuitized end of year balance (a new Secure Act 2.0 feature). If needed, the surviving spouse can then use the Roth account to cover any additional needs without tax implications. This combination minimizes the widower’s tax penalty.
Sounds like a well thought out plan.
This issue is most important for the DIY investor since your Financial Advisor usually guides the surviving spouse (they ought to for the thousands or tens of thousands you pay them each yr). People smarter than me (Rational Reminder) say the issue isn’t income but asset allocation as you can always sell off pieces to provide income. Humanoids that have always had a paycheck want some replacement check to feel comfy, even if it provides a lower IRR like annuities or dividends. I guess I am one that can’t have 100% stock and pick off some shares when I need, even though those smart people have said it ends up with a higher number.
I’m not sure if those people are smarter or not. I think an income stream for a survivor is critical for more people than asset allocation.
I took a very hard look at the survivor issue before we built the new house, which I knew would come with higher property tax expense. Neither of us have a significant DB pension income, so am grateful for the SS survivor benefit. I didn’t claim SS until age 70, so between that her eventual RMD and other lesser sources of income, and our low cost of living, her total expenses will only be about 72% of income.
We chose 100% survivor benefit for my pension. The difference between that and just covering me was about $150/month. I had said to my wife if that difference was a deal breaker at that time we shouldn’t have retired before claiming SS. The decision was also made easier by the fact that barring an accident she is likely to live to 100+ like her mother and great aunt.
Many comments state delaying SS to age 70 as a strategy. It is a 100% survivor annuity after all, but seems like that creates risk too especially if a person retires well before age 70.
Does the SS delay happen at any cost of a desired lifestyle before age 70?
I’m surprised life insurance does not play a larger role in this planning given the tax benefits.
Just to be precise, SS isn’t a “100% survivor annuity after all”. Government Pension Offset (GPO) reduces or eliminates the SS survivor benefit for any surviving spouse that has a government pension (such as teachers, civil servants, police, firemen, etc), which is a substantial number of people.
What one does with SS should be highly dependent on one’s own situation. Do you have any other pensions? If so, are they indexed for inflation? Are you single or married? If married what is the difference in SS payout between the two of you? If married what is the age difference between the two of you? When will you retire relative to your benefits start date? What sort of resources do you have to cover the gap between retirement and ages 62, 67 and 70? What is your health?
And then you need to consider what is your goal with your SS? Do you want to minimize longevity risk or do you want to maximize potential payout from SS? It’s not a simple decision.
We have to wonder if the original designers ever thought it would become so complicated.
I can understand trying to maximize the monthly benefit based on circumstances, but it is beyond me if the goal is to maximize the lifetime benefits received.
I think part of the problem is how SS is presented by age. In reality the normal retirement age is 70 and there is a reduction for each month younger the benefit starts, not an addition from an earlier age.
I think they should throw out NRA and refer the options as minimum and maximum benefit.
One of themes I see in various retirement forums is individuals seemingly looking at Social Security in isolation without consideration of their spouses or indeed the rest of their retirement plan. My wife and I have certainly considered the survivor in our planning-for me, it’s a primary goal given life expectancy statistics. In our case, I am delaying to 70 and my wife to 67 and we will start drawing at around the same time. My benefit will be higher. I will have 2 small pensions, my wife will have one and all three are/will be 100% joint and survivor. We recently each bought single life QLACs to provide additional security for both of us as we age. We also have an FA who can provide continuity and support-he has built a safety first retirement income plan which provides both peace of mind and a license to spend. Finally, we plan to move to a CCRC eventually to provide social and health care support.
We are 64. I retired at 58 and my wife at 62. . My wife has a small pension and social security benefit that we are now drawing along with my larger pension. We are deferring my larger social security benefit probably till 70. My wife will collect 50% of my pension upon my death. To address the shortfall my wife would experience should I unexpectedly die in the decade prior to collecting social security, I took out a small 10 year fixed term/fixed premium life insurance policy that would cover the 50% reduction in my pension upon my death. That will allow her to continue to defer my social security till the maximum survivor benefit. At that point, my social security plus her pension, 1/2 of my pension, and modest portfolio withdrawals should allow her to easily maintain her lifestyle. That’s the plan anyway.
Survivor income and in general income later in retirement is an area I’m still trying to get figured out especially with a wife who is seven years younger than me who isn’t interested in managing finances at all. We have no pensions, other than Social Security, so no survivor benefits to address. We will both delay claiming SS until age 70 to maximize the payment amounts. Right now, we have a TIP’s ladder that will take us out until I’m in my 90’s but I haven’t decided on what to do from there or if I really want the ladder to last that long. Giving serious consideration to converting to SPIA’s with an annual adjustment somewhere in my 80’s to make things simpler for my most likely cognitively challenged older self and my disinterested wife.
Cognitively challenged older self is another underdiscussed topic of some concern.
Have you figured life insurance into your plans?
We have no life insurance and no plans to add any. When we were younger and still had children to raise and careers with lots of future income, we had lots of term life. Once we reached financial independence and retired, we dropped it all as no one is dependent on our future incomes.
When I was managing pension plans the debate was always whether to take a survivor annuity or to buy life insurance with the amount the pension would be reduced for the survivor annuity. Many advantages to the life insurance, but when people near retirement decided that, it was too late.
That’s a good discussion to have when one has a pension. When one does not have a pension, it is not needed. Instead of buying a whole life policy we got term life and invested the difference. With those funds I now have the option to “buy” my pension via a SPIA.
This was a pretty important topic to me when my wife and I got married 4 years before we retired. Besides planning for income (which is priority #1), there’s other considerations as well. For example, my wife worked for local government and I was a federal civil servant, so that created some other peculiar issues to figure out and provide for. For example, my wife’s health care was free while she was working, but expensive in retirement. But in order to guarantee she’ll be able to have my health plan in retirement, I needed to add her and pay the premium during our working years. Otherwise she wouldn’t have been eligible after I retired (or if I had died before retirement). Similarly, even being on my health plan at my death wouldn’t allow her to stay on it unless she also had some survivor benefit of my federal pension. Another thing we realized was that for me working to 70 to maximize my social security (for her later benefit) wasn’t a good plan since her spousal benefit is reduced to $0 per GPO. My point isn’t that this is “unfair”, but rather even good benefit plans come with unexpected restrictions that can cause a lot of heartache if they aren’t known and planned for ahead of time.
Dick, this topic is very important to me, thanks for posting. If you glanced through the deacons’ questions I posted earlier this week, you’ll notice several references to considering a spouse when making financial decisions.
In my own family, there is no pension, but we are delaying Social Security to increase overall income, choosing Roth options with current workplace savings and looking to opportunities for Roth conversion. Also, we double check beneficiaries on accounts, add POD/TODs to accounts when available, keep each other in the loop on management of finances and so on.
Also, in the debate of whether to pay off debt or invest the money, couples should consider the debt burden on the remaining spouse if one income disappears because of death.
You’re right, this is an under-addressed topic. Thanks for starting a discussion.
We plan to delay SS for the higher earner until 70.
We have the necessary estate documents and are also each other’s primary beneficiary on everything.
The survivor will benefit from a nice setup in basis on our taxable accounts, which represent a significant portion of our portfolio.
I have paid up insurance with a cash value that I’ve no plans to take unless my wife predeceases me.
We have similar to you, Dick, without the life insurance. The (small) pension spouse gets we chose joint and 100% survivor benefits. One thing that nobody has mentioned so far is we also have a paid off house for the surviving spouse to use for their care. We have not taken SS yet. Delaying as long as possible. Not sure if we will make to 70. Chris
As a last resort Connie would have two paid off houses to use the value.
We both started SS at FRA and for several years invested the payments in municipal bond funds, now we have a nice total balance and monthly tax-free interest as income if needed.
Dick, I’m curious as to why, with a wife 4 years older than you, you elected 50% rather than 100% survivor annuity? Pretty sure the reduction in monthly payout for doing so would have been minuscule.
My pension reductions for J&S were as follows. I chose 75%, but not for any great reason. It was a gut-feeling, chose the middle kind of decision.
50% J&S – 8.2% reduction
75% J&S – 12.3% reduction
50% J&S – 15.3% reduction
You know how I feel about income replacement, that was part of it, but also I don’t recall the 100% J&S reduction as being a minuscule amount. I think if it was, I would have taken it. I also considered the total resources available.
Also, because Connie is older we are pretty actuarially equal so at least that way she would not have to live alone that many additional years.
Dangerous assumption to use only actuarial lifetimes in addressing this important question, and the younger you are the worse it is. More concerning is someone getting hit by a bus next week. How is the survivor fixed for potentially several years alone?
For me, the benefit reduction reduction was less than 5%…a small price to pay to know that Lisa would get the full pension if I were to die tomorrow. Our age gap is less than that between you and Connie, so I would have expected something similar in your case.
Definitely more than 5% or i would have taken it for sure. It depends on the factors in the formula.
I assumed your pension only had a 50% survivor annuity. I would never make a decision based on actuarial equivalence since that is only an average. However, two of you are clearly well-off so, based on your descriptions of your assets, I’m sure Connie would be okay in the unlikely event that she outlives you for 10-20 years.
I can’t believe there aren’t more “Likes” for this Forum post. It is certainly something my wife and I discussed and considered when we established our wills and trusts. Since we both have kids (and history) from prior marriages, we were very careful to craft documents that considered our children and their families. But we also had to consider that my wife is 5 years younger than me. We both have longevity on our side, but even with that, she may outlive me by quite a bit. I delayed SS until I was 70 so her survivor benefit would be as high as possible. I have a long term care policy that has a term insurance benefit rider. After her pension, we both have investment and tax-deferred accounts. I think we’re OK in this area, but I examine this every year or so.
Thanks for raising this important issue.
Dick, this is a great topic and I share I share your concern. We elected a 75% J&S for my pension. My wife has better longevity in her family, (one grandmother lived to 97) so we are delaying my SS to 70 to maximize the larger survivor value. And we have retirement savings and real estate.
You’ve also written about having complete estate documents, and detailed written instructions for the surviving spouse and heirs where appropriate.