Married women face a special retirement planning challenge that’s best addressed when they and their spouse transition into retirement. Here’s the problem: When one spouse passes away, the survivor’s retirement income usually drops much more than their living expenses do. This often results in the phenomenon I’ve called the “retired widow’s money crunch.”
Most of the time, the surviving spouse is the wife, since women are often younger than their spouses and tend to outlive men by a few years.
The first step to addressing this planning challenge is to learn more about your specific situation. Below are six questions you and your spouse should answer when planning your retirement. The answers will help you determine how this challenge could apply specifically to you and your spouse and, in the process, help you develop strategies to protect the surviving spouse.
Question #1: How Much Will Your Household Income From Social Security Drop When One Spouse Passes Away?
For most retirees, Social Security benefits are the largest source of lifetime retirement income. Most retired couples will receive two Social Security checks while both spouses are alive. After one spouse passes away, however, Social Security only sends one check that’s the larger of the two checks that both spouses were receiving while they were alive. As a result, your household income will decrease, often significantly. It’s important to conduct “what if” analyses to estimate the Social Security benefit that will continue to be paid to each spouse if the other spouse passes away first.
Question #2: How Will Any Pension Income Be Affected When One Spouse Passes Away?
If you’re lucky enough to receive significant amounts of traditional lifetime pension income, you’ll want to understand how the monthly check you receive will be affected when one spouse passes away. The answer will depend on the form of payment elected at retirement by the working spouse who participated in the pension plan.
The only circumstance when there’s no change in the pension amount is if the working spouse elected a 100% joint and survivor annuity. If, however, he or she elected a 50% joint and survivor annuity, the pension income will reduce in half upon the death of the working spouse. And if the working spouse elected a life-only annuity, then the pension income will stop completely upon the death of the working spouse.
Question #3: When Deploying Retirement Savings To Generate Lifetime Income, Will Sufficient Income Be Continued To The Surviving Spouse?
Once again, the answer depends on the methods you and your spouse selected at retirement for deploying savings to generate retirement income. For any savings that are used to purchase a lifetime annuity from an insurance company, the issues are the same as described above for pension income: The percentage of income that’s continued to the surviving spouse depends on whether the couple elected a joint and survivor annuity and the associated continuation percentage.
For savings that are invested and use a systematic withdrawal method to generate regular retirement paychecks, the amount of assets that remain for the surviving spouse depends on the aggressiveness of the withdrawal percentage and the investment strategy you’ve selected. Usually, a conservative withdrawal strategy with a high allocation to stocks can produce significant amounts of remaining savings down the road when one spouse passes away.
In this case, a conservative withdrawal strategy could be a flexible strategy that adjusts the withdrawal amount up or down to reflect emerging investment experience. It would also use a low withdrawal percentage that’s applied to remaining assets each year to determine your annual withdrawal amount. One such strategy involves using the withdrawal percentages from the IRS required minimum distribution.
Question #4: Are You Relying Too Much On Part-Time Work To Cover Your Retirement Expenses?
Many retirees continue working after their full retirement while also receiving income from Social Security, pensions, and retirement paychecks generated by their savings. If they barely make ends meet while they’re both alive, there could be a problem when they lose the income after the working spouse passes away.
Instead of relying on working income at the same time you’re getting Social Security benefits, pensions, and retirement paychecks from savings, it’s better to use that working income to enable you and your spouse to delay starting retirement income to let it grow. Another possibility is to use your working income only to pay for “nice to have” living expenses and not rely on it for your “must have” living expenses.
Question #5: Would Taking Out A Reverse Mortgage While Both Spouses Are Alive Compromise The Financial Security Of The Surviving Spouse?
Many retiring couples have more wealth in their home equity compared to their retirement savings, and it’s tempting to tap that wealth through a reverse mortgage. If you’re considering this, you’ll want to understand the consequences of such an action to the surviving spouse. Will they be able to afford continuing to pay for all the costs of the home, such as home repairs, property taxes, and homeowners insurance? These expenses won’t change when one spouse passes away.
If the surviving spouse’s income is insufficient, for the various reasons indicated in this post, they could be forced to sell the house and move, potentially at a time when they’re vulnerable.
Question #6: How Much Could Your Living Expenses Change After One Spouse Passes Away?
It can be eye-opening to consider all the living expenses that won’t change when one spouse passes away, such as housing expenses mentioned previously. Once you’ve estimated these living expenses for the surviving spouse, you can see if the total retirement money available to the surviving spouse will be enough to pay for these expenses. If not, you have a planning challenge to address.
Answering these questions and developing appropriate strategies is often beyond the capabilities of most people without a little help. As a result, you may want to work with an advisor who has the appropriate training and qualifications for retirement income planning and is paid to have your best interests at heart.
Taking steps to prevent the retired widow’s money crunch is one important way to show how much you care for each other.