One of you may be living as a survivor for a long time. Are you prepared?
Here’s a question for couples whose retirement is imminent. You think you’ve got it all figured out. Now, what’s your widowhood plan?
There’s a good chance one of you will be alone for a decade. This has an impact on both your budget and the matter of who’s managing the finances.
I thought of this recently on running into a small-business owner I know who’s 66. How is your 401(k) invested? I asked.
I was warming up to deliver a lecture about switching to lower-cost funds. I didn’t get the chance, because this guy didn’t have a clue about his funds. He explained that all of his finances, including billing, taxes and investing, are handled by his wife.
A fine arrangement for now, but if she dies young he will be not just grieving but helpless.
Financial management is one matter, budgeting another. How much will the household’s spending go down when one of you dies? How much will the income go down?
Start by contemplating some actuarial odds. When I look at my own family tree, I see women consistently outliving their husbands, typically by a dozen years or so. One of my great-grandmothers was a widow for 29 years.
Some widowhoods last much longer than that. The last widow to collect a Civil War veteran pension was a woman who outlived her husband by 65 years.
Will your widow(er) be well provided for? That should be at the top of mind in the decision about when to collect Social Security. If you’re turning 62 this year, you can start now. But you’d boost your benefit 76% by waiting until age 70 to collect.
You might think that if your health is poor it makes sense to start early. But if you are married to a healthy, lower-earning spouse, early benefits are probably a mistake. When you depart, your spouse will collect whatever you were collecting. (Survivors get the higher of their own retirement benefit or the decedent’s, not the sum of the two.) She or he may be living with your choice for 29 years.
I’ve gathered the economics of early versus late claiming in a Social Security calculator. Open the file in Google Sheets, make a copy, then enter ages, genders and other data in the copy. You will probably find that early collecting chops $100,000 or more out of your family’s expected payoff.
A similar trade-off comes into play with a corporate pension. Do you take $4,000 a month for your life only or $3,200 with a joint and survivor annuity? The latter might be the better deal. I have a guide for that decision, too: see the pension calculator. Same Google Sheets procedure.
The pension calculator has a feature useful to retirees with or without a corporate pension: On line 24 it provides a number for expected widow(er)hood, in years. The number is based on a couple’s ages, health statuses and genders.
My arithmetic uses a simplifying assumption, that a couple’s death dates are independent. That’s not the case, since there is such a thing as dying of heartbreak (like George H.W. Bush not living long after Barbara passed away). But the shortcut doesn’t do too much damage to reality. You’ll probably see a double-digit number for years lived alone.
I’ll close with two pieces of advice for that small-business owner, or any other couple in which one person makes all the investing decisions.
The first rule is to own only things that have a price you see quoted every day. U.S. Treasury bonds are okay. Stocks, like shares in Apple or AT&T, are okay. Mutual funds and exchange-traded funds are okay.
Not okay: complicated things sold by stockbrokers. Those would include hedge funds and indexed annuities. Something with a 60-page prospectus and a name like Enhanced Yield Protected Insured Portfolio III is almost certainly a bad buy, although you’d need a roomful of mathematicians to find out why.
The second rule, aimed at the survivor who never before had to make financial decisions solo, is to pay for advice by the hour. Most financial planners would prefer to pocket a percentage of your assets. Don’t agree to that. Hourly advisors are scarce but not impossible to find.
