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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.