Accounting for Predecease

[bUU]

In preparing and maintaining our retirement plan, there's a lot of consideration about longevity, life expectancy, etc., including a lot of talk about outliving our resources. But it got me thinking about the possible flip-side impacts of shorter longevity. With a ten year age difference, it is likely that one spouse will predecease the other by a significant number of years. Putting aside the emotional toll that causes, there are financial effects: While it will reduce some expenses (such as healthcare), it will also cut off some income: Without a doubt, social security benefits end (and it may also be true that some of the deceased's assets may be bequeathed to someone other than the spouse - but since that's an open-ended variable, let's ignore that). Furthermore, while to some extent, for at least part of retirement, each spouse acts as some measure of assurance against the need for long-term care, that assurance evaporates with the death of one of the spouses.

If you anticipate a significant amount of time where one spouse predeceases the other, is there anything specific you do to adjust your retirement plan to account for that?

 

[gauss]

We each have large ADD (accidental death, dismemberment) policies. I figured that at our young ages this would be the most likely cause of an early demise. ADD insurance for us was much less expensive than a traditional term life policy.

With no real survivorship options for Social Security for dual-income couples, I view this as a prudent hedge.

-gauss

 

[Throwdownmyaceinthehole]

The only thing I did was run Firecalc with both SS for 35 years and compare with only one SS for 35 years as I didn't see a way to run it with one SS stopping at let's say 15-20 years out.

 

[Katsmeow]

My husband is 6 1/2 years older than me so I have definitely considered this. Basically I've run budgets assuming that there is only one of us with SS (our SS is very similar in amount) and looking at how expenses will change. For us, I found that our reduced expenses would offset the lose of SS. Taxes would be higher though at the single rate.

 

[Live And Learn]

As far as I can tell, individual expenses and individual SSI for DH and I are a wash. In other words, his "costs" are equal to his SSI and my costs plus vacations (since he probably would never travel if I didn't "force" him to once in awhile) are equal to my SSI.

The risk of LTC for the first person is much higher for the first person than the second person. LTC for the first person can deplete the second persons remaining assets. If the second person needs LTC then all remaining assets are available to the LTC facility (assuming that you are ok reducing assets to zero). To partially offset the risk of one of us needing LTC while the second does not, I've set aside 100k from my portfolio and do not consider it in making financial decisions. Is it enough ? who knows - but it's better than nothing.

 

[Moemg]

If you anticipate a significant amount of time where one spouse predeceases the other, is there anything specific you do to adjust your retirement plan to account for that?

Unless there is a huge age difference in spouses and even then it is hard to predict . I was widowed at 51 and the best things my late husband did was have a pension with survivor benefits and leave me with a list that made transferring the assets easy to follow. I make a similar list for my SO & my daughter . Things included in the list are 1- places that need to be notified of death 2- where assets are located 3- where passwords are located 4- Wills, power of attorney , health care surrogate 5- titles & deeds 6-burial wishes. When you are faced with a sudden death and then have to deal with all the details a list makes it so much easier .The only thing I did to adjust my retirement plan was work an additional nine years.As for expenses changing .It was minimal . Same taxes & home insurance ,small change in car insurance ,less groceries , more money spent on socializing since you are by yourself .

 

[tulak]

We each have large ADD (accidental death, dismemberment) policies. I figured that at our young ages this would be the most likely cause of an early demise. ADD insurance for us was much less expensive than a traditional term life policy.

With no real survivorship options for Social Security for dual-income couples, I view this as a prudent hedge.

-gauss

I went this route when I was younger, but recently I purchased a term policy. I wish I did it sooner, since my rate would have been lower. Plus, AD&D doesn't cover everything, whereas a term policy does.

As a side note, the amount/time frame I chose was based on how much longer I plan to work and how make over that time frame.

Answering the OPs question, we're planning on being able to live off the portfolio, so social security, pensions (small) are all extra. if the portfolio is enough for two of us, then it should be able to easily sustain one.

 

[Animorph]

I have run the rough numbers for either of us passing first. Like the others, we lose one SS benefit and possibly our one pension. Our expenses won't go down as much as our income. Our taxes will go up with the lower single tax brackets. In our case we'll be drawing more from our portfolio, but we each have individual accounts not in the retirement portfolio that will transfer to the surviving spouse. That should boost it enough to maintain the status quo.

This was the scenario that was our last hurdle to FIRE. A little tougher for us than assuming we both live until 120.

 

[Danmar]

My DW is 7 years my junior. My pension has full survivor benefits to her. SS immaterial. She inherits all assets. She will be much better off financially without me.

 

[gerntz]

Unless there is a huge age difference in spouses and even then it is hard to predict . I was widowed at 51 and the best things my late husband did was have a pension with survivor benefits and leave me with a list that made transferring the assets easy to follow. I make a similar list for my SO & my daughter . Things included in the list are 1- places that need to be notified of death 2- where assets are located 3- where passwords are located 4- Wills, power of attorney , health care surrogate 5- titles & deeds 6-burial wishes. When you are faced with a sudden death and then have to deal with all the details a list makes it so much easier .The only thing I did to adjust my retirement plan was work an additional nine years.As for expenses changing .It was minimal . Same taxes & home insurance ,small change in car insurance ,less groceries , more money spent on socializing since you are by yourself .

Good thoughts & list. Thanks.

 

[gerntz]

With no real survivorship options for Social Security for dual-income couples, I view this as a prudent hedge.

Well, if the larger SS beneficiary doesn't start benefits till age 70, the survivor gets a larger percentage of their combined benefits.

 

[Walt34]

As far as I can tell, individual expenses and individual SSI for DH and I are a wash.

That's about where we are too. We've talked about it. While the pension drops 30% when I croak, she would sell this house and buy a smaller place (silly to keep it for one person). She wouldn't want to deal with the upkeep anyway. One less vehicle, fewer groceries etc. So her daily standard of living wouldn't change much if at all. And there's some life insurance on me that would give her the resources to hire whatever help she needed plus some without impacting any other resources.

 

[REWahoo]

I've looked at this at some length, calculating how DW's income would change should I go first. Since I have no pension or life insurance, the financial impact to her would be in two areas: decreased SS income and increased fed income taxes. The combined hit would reduce current net income by approximately 15%, which should leave her with a comfortable amount to meet all her expenses and still spoil the grandkids.

I also put together some suggested guidelines on how to draw income from the portfolio as well as how to invest it (55% Wellesley, 35% Wellington, 10% cash). Whether she and her new financial advisor (DD#1, a CPA) follow these guidelines is up to them. I won't lose any sleep over it.

 

[Independent]

I have my own projection worksheet that allows me to input my date of death. After that date, the worksheet targets 2/3 of our joint spending, uses the correct survivor's SS benefit, uses the correct pension survivor's benefit, adds in a lump sum for a small group life policy, and (of course) continues with 100% of the asset total at death.

I've tried various dates of death. I find no hardship for my wife after my death. Basically, the good stuff (keeping 100% of the assets, dropping expenses) outweighs the bad stuff (reduced SS and pension benefits).

I haven't put in differential taxes. I've guessed that if FIT is an issue, that means that her before tax income is pretty good, and she's also doing fine after tax.

 

[Animorph]

For 2013: https://turbotax.intuit.com/tax-too...2013-Federal-Tax-Rate-Schedules/INF12044.html

Married: 25% bracket starts at $72,500
Single : 25% bracket starts at $36,250

Might be tough to stay within the 15% bracket if your expenses don't halve.

 

[JakeBrake]

My parents were the same age within a couple of months, but my mother outlived my father by 22 years. They were both already retired when he died. Her brother was a CFA who handled her finances ably. The brother was 12 years younger than my mother. Unfortunately, he died several years before before she did. She maintained the financial plan that her brother had set up. She believed in LBYM and finances were not a problem until she was afflicted with dementia. She often said that she did not realize what my father and her brother were doing for her until they were not doing it anymore.

As for me. I took my MegaCorp pension as a lump sum and we can see it in my Vanguard rollover IRA every day where it is invested mainly in Target Retirement funds. Also have a rollover IRA that was my MegaCorp 401K, as well as Roth IRA's

I took my SS at FRA and DW took spousal SS at FRA. So if either one of us died the survivor would lose only her spousal SS. I will get life insurance from MegaCorp equal to half of my salary at retirement.

We both have separate LTC policies. Our problem is we live on acreage we both love, but which requires extensive and expensive maintenance.

 

[Independent]

For 2013: https://turbotax.intuit.com/tax-too...2013-Federal-Tax-Rate-Schedules/INF12044.html

Married: 25% bracket starts at $72,500
Single : 25% bracket starts at $36,250

Might be tough to stay within the 15% bracket if your expenses don't halve.

I did a sample calc. A couple with $45k in SS income and $45 in other (e.g. pension, IRA withdrawals) income, compared to a single person with $30k and $30k.

For the couple, $25,975 of the SS benefit gets into AGI.
Taxable income (after standard deduction and two personal exemptions) is $50,975.
Taking that into the table, FIT is $6,754.
After FIT income is $83,246.

For the single, $13,850 of the SS benefit gets into AGI.
Taxable income (after standard deduction and one personal exemption) is $33,850.
Taking that into the table, FIT is $4,631.
After FIT income is $55,369.

The before tax income went down by exactly 1/3 when the couple turned into a single. If FIT had gone down by 1/3, it would have been $4,503. Instead, it's $4,631, or an extra $127 per year. (Note that the SS benefit went down by 33%, but the taxable portion of the SS benefit went down by 47%.)

In this particular case, it seems that the differential tax effect is small enough to ignore. I don't know about other cases (and, I've been known to make math errors, so I should check this some other day).

Edit: I can construct an example in which the single person gets into the 25% bracket while the couple hadn't been. I used ordinary incomes of $54k and $36k. In this case, the "extra" FIT is $1,000 per year on an after-FIT income of $58k.

 

[REWahoo]

Independent, I see your edit which touches on the problem, but here is an example of the potential hit to a surviving spouse at a slightly higher income:

Married filing jointly, standard deduction
SS income $33,000
IRA/pension income $50,000
FIT $7,016 (15% marginal bracket)
After FIT income $75,984

Filing single, standard deduction
SS income $22,000
IRA/pension income $50,000
FIT $10,235 (25% marginal bracket)
After FIT income $61,765

Bottom line, a decrease of $11,000 in SS combined with a whopping 46% tax increase nets the surviving spouse $14,189 less per year to spend.

 

[Independent]

Independent, I see your edit which touches on the problem, but here is an example of the potential hit to a surviving spouse at a slightly higher income:

Married filing jointly, standard deduction
SS income $33,000
IRA/pension income $50,000
FIT $7,016 (15% marginal bracket)
After FIT income $75,984

Filing single, standard deduction
SS income $22,000
IRA/pension income $50,000
FIT $10,235 (25% marginal bracket)
After FIT income $61,765

Bottom line, a decrease of $11,000 in SS combined with a whopping 46% tax increase nets the surviving spouse $14,189 less per year to spend.

I believe the numbers, but I don't see the relevance of this example for my retirement planning.

I want to provide a "reasonable" lifetime income for both of us. In this case, "reasonable" may mean "continue pre-retirement lifestyle".

The question is:
Suppose I've convinced myself that we have a plan which will provide that reasonable income for both of us, if we both live to old age and die in the same year.
Now, does that plan fail if one of us dies substantially earlier than the other?

In this case, I assume that the "reasonable" income for a the survivor is 2/3 the income for the couple. When running my projections, I simply reduce the before-FIT numbers by 1/3. Have I made a serious error because of the graduated FIT brackets? That is, does the after-FIT income drop by a lot more than 1/3?

My answer is "no", at least for people in range where less than 85% of SS benefits get into taxable income. So the before-FIT analysis is good enough for my goals.

In your example, you're providing a pre-FIT income to the surviving spouse of 87% of the joint income (72/83). In that case, FIT is a lot more relevant. 87% seems like a very high target to me, but it might fit your spending pattern.

 

[Animorph]

I'm sure it depends on the exact numbers, but for our case single taxes + loss of 1/2 of SS were a big hit and required additional portfolio value margin for us to feel comfortable. It's something everyone should think of, though it may not be a problem for some.

 

[REWahoo]

I believe the numbers, but I don't see the relevance of this example for my retirement planning.

I understand.

I posted because this thread isn't just about your retirement planning. The net income changes resulting from death of a spouse can vary significantly depending on income levels and the source of the income. My example was posted to help illustrate this fact.

 

[Ed_The_Gypsy]

Here is one example from my calcs using TurboTax. This assumes that everything is in an IRA and MRDs are required and one of us dies at 72, compared to the same situation but we are both alive at 72: The survivor is hit with about $23k less income, other things being equal. This is a 52% reduction in income in this case.

Now you can see why, as a strategy, I want to convert my IRA 100% to a Roth before RMDs start, regardless of the marginal rate.

I wish I had looked into this long ago. My thanks to board members who prodded me to run the numbers.

By the way, an ADD life insurance policy is almost worthless. Get term life.

 

[Alan]

The surviving spouse is going to be hit with a higher taxes simply by filing single, but I would expect they may also have much higher RMD's being taxed at a higher marginal rate then when they MFJ, assuming their spouse left IRA's to them. This is another reason for doing ROTH conversions.

 

[Khan]

He is not permitted to die first.

I am setting it up so he has SS and medicare and health insurance and will inherit any cash left behind, and I have a small life insurance policy. His death would barely affect my income but I would have to move to assisted living or near/with a friend.

 

[harley]

She will be much better off financially without me.

This is a situation that should be avoided if possible.