Retirement -- Financial Planning for the Survivor.

[chinaco]

How many have a Financial plan in place that considers the death of a spouse? Often people are relying on SS or Pensions where the stream of income stops or diminishes after a spouse dies.

This happened to my mother. When my father died, the income streams cut by 30 to 40%. Of course, the house was paid off and they had a small nest egg. But she was very concerned about dipping into the nest egg so she tried to make do spending less money... and she worried about it a lot. On the positive side... she had a large enough nest egg to give her some cushion for emergency expenses or other large repair expenses like repairs to the house, etc.


For people who have smaller portfolios and rely on SS heavily (or even pensions)... the death of one spouse can put the survivor in a very precarious position. For a simple example: If both spouses draw $16k/yr from SS, they receive in total $32k per year. Let's assume the couple have a small nest egg of $200k. Between them they spend $40k/year. They are taking 4% of the 200k. At 67 one of the spouses dies. Now the survivor has $16k/year from SS. Add the extra $8k. The survivor has $24k/year. However many of the expenses are fixed (not variable based on # people). Yes, food and medical expenses may go down, but many other expenses remain the same. Can the survivor maintain the basic lifestyle on $24k? Or will they need to begin taking a higher % from the portfolio? Hopefully the medical problem (costs) did not diminish the portfolio for the spouse that died.


The situations becomes even more problematic if the couple ERd at 55 and one dies even earlier. Bottom line, the survivor is very likely to be in a situation where they need to go find a job at an older age. Plus, If the survivor has been out of the work force for a while, they have little chance of acquiring the previous wage level (e.g., will probably work at WalMart).


Every couple should have some sort of contingency plan (and resources set aside) to support the survivor if the income of one of the spouses stops due to death. If one has sufficient money (portfolio size), they should be fine. If not, it can be done with Life insurance. Of course, you can only get life insurance if you do so while you are healthy (but it comes at a cost).

The bottom line, is if this is not done someone will be at risk of having a diminished lifestyle (perhaps at the poverty level) or going back to work (if they are healthy and able). And that survivor could be you!


How are you dealing with this aspect of planning?