How do you plan for possibility of early death of a spouse in FIRE

[Ready-4-ER-at-14]

We have been doing :

1. the Roth Conversion that many have suggested. Plan to have it done ASAP before RMDs kick in. One more year of doing this. This causes a tax bump and higher Medicare premiums, but for just a few years. So far every time we took a huge tax hit market grew nicely and net worth replenished well before my best hopes.
2. own growth stock in cash stock account with spouse as primary beneficiary and heirs as secondary beneficiaries. Planning on step up benefit for heirs.
3. own one cash account with a specific parent of our grandchild as named beneficiary just to make contributions easy in an international setting.
4. have purchased for lifetime payout annuity (return of principal clause) with cash. Only 1/3 is taxable for about 20 years.
5. looking at purchasing an annuity using regular ira money that turns on a few years after RMD of youngest of us that has no RMD requirement till turned on.
(consider it a bump in income when travel expenses probably go down and assistance expenses may go up. Some consider it old age support or self insurance if to assisted living of some form.)

 

[TheWizard]

My wife is more than 10 years older than me, so I have planned for this in my calculations.
I already took an annuity because of this, since I have to take SS at 62 and she'll be getting 50% of my SS at full retirement age.

Why do you HAVE to take SS at 62?

 

[Winemaker]

We are converting all of DW's tIRAs to a Roth first. I'm planning to take SS at 70, my benefit is more than twice her current benefit. That would give her 7 figures tax free. I'm currently one year away from FRA, and she started her benefit at 65. Her fixed income stream would be ~$115k, enough for her and the new pool boy, new pool, landscaper, and guy who follows her around fixing what she broke.

 

[Exchme]

Great thread! We have a friend who’s husband took care of all their financials. He used his employer’s laptop and his phone for all the record keeping, statements, accounts, etc. He died suddenly and she had absolutely no idea what to do.

The company shut down the computer and she didn’t know the PIN on his phone.

She had no clue where their money was, how much there was or any idea about investing or money management. At first, she had no access to any money but their checking account. He had some life insurance through work and that was the first money she got to live on.

Once the initial shock of losing her husband passed, she remembered she had heard the name of a brokerage. She called and they had an account, but it was in his name and she didn’t know the password or any security questions. It took several weeks to get the death certificate; with that, she was able to get access to the brokerage account. She sent death certificates around to various likely financial companies to see if could find more money, didn’t find any more, but it’s hard to be certain there isn’t something else somewhere, especially since she doesn’t even know his e-mail password, so they might send notices of tax forms being ready and she wouldn’t know. (If there is a taxable account, I guess the IRS will eventually tell her she messed up the taxes!)

He had a 401K with his employer and a small pension. Altogether, there was $3M, plus his pension and SS and she is very frugal, so she will be more than fine. But it’s a life lesson not to leave your spouse in the dark, even if they seem to have no interest in the topic. It was inexcusable to put her through so much financial worry at a time of grief and other worries about the future. A simple “death book” describing where things are and what to do would have eased that worry and some simple discussions about money management would have provided a lot more confidence.

 

[fosterscik]

We are converting all of DW's tIRAs to a Roth first. I'm planning to take SS at 70, my benefit is more than twice her current benefit. That would give her 7 figures tax free. I'm currently one year away from FRA, and she started her benefit at 65. Her fixed income stream would be ~$115k, enough for her and the new pool boy, new pool, landscaper, and guy who follows her around fixing what she broke.

We've been retired now for ~ 6 years. Like many here, one spouse (me) has handled the finances and because of that I worried about DW handling the finances if I were to go first.

To mitigate that I:
1). Made her small diet cola pension (3% every year regardless of inflation) a single life. I'm sure I will spend much less that we do as a couple and felt it was worth the "risk" given typical longevities of men and women and the increased payout before I take SS. I have no pension.
2). DW took her SS at 62; I'm delaying to 70 to maximize survivor benefits.
3). I made sure all Roth conversions were in DWs IRAs until they were all converted.
4). I'm now converting my IRAs but won't get everything switched until RMDs start (for me; DW has none left to make). Having unconverted IRAs as long as they are less than $500k or so left doesn't pose any problems. My/our portfolio has to partially support us and the RMD sizes are relatively small (compared to our drawdown) and will be needed as living expenses.
5) I maintain a "state of stash" letter with all account info, credit card, mortgage, etc. info as well as "how to" notes on portfolio withdrawals, tax info etc. Even if DW is overwhelmed, one of our kids should be able to understand how to proceed. (I also make sure I include current last pass passwords as well as phone accout logins, lock codes etc to ensure easy access).

 

[brett]

Brett most Credit Cards have a primary and authorized user. When they find out you’ve passed and you’re primary auto pay will fail and the credit card inactivated. I’ve placed all our auto pay in DW credit card in her name. It’s easier for me to deal with if DW goes first.

Yes, thanks. Very aware of that and I do the same.

My spouse has investments in her name and crediit cards solely in her name.

We put some expenses through those cards. A few large ones from time to time.

The purpose is two fold. First, so she always has a card that she will be able to use with a high credit limit. Second, to establish a credit record for her.

 

[Surewhitey]

Great thread! We have a friend who’s husband took care of all their financials. He used his employer’s laptop and his phone for all the record keeping, statements, accounts, etc. He died suddenly and she had absolutely no idea what to do.

The company shut down the computer and she didn’t know the PIN on his phone.

She had no clue where their money was, how much there was or any idea about investing or money management. At first, she had no access to any money but their checking account. He had some life insurance through work and that was the first money she got to live on.

Once the initial shock of losing her husband passed, she remembered she had heard the name of a brokerage. She called and they had an account, but it was in his name and she didn’t know the password or any security questions. It took several weeks to get the death certificate; with that, she was able to get access to the brokerage account. She sent death certificates around to various likely financial companies to see if could find more money, didn’t find any more, but it’s hard to be certain there isn’t something else somewhere, especially since she doesn’t even know his e-mail password, so they might send notices of tax forms being ready and she wouldn’t know. (If there is a taxable account, I guess the IRS will eventually tell her she messed up the taxes!)

He had a 401K with his employer and a small pension. Altogether, there was $3M, plus his pension and SS and she is very frugal, so she will be more than fine. But it’s a life lesson not to leave your spouse in the dark, even if they seem to have no interest in the topic. It was inexcusable to put her through so much financial worry at a time of grief and other worries about the future. A simple “death book” describing where things are and what to do would have eased that worry and some simple discussions about money management would have provided a lot more confidence.

Agreed on at least giving your spouse a cheat sheet for general info. I set up Quicken Simplifi to give her all the information in one place & put the app on her IPad. She knows all the accounts today, but may forget some in the future. We have everything set up for POD or Beneficiary, except for the house and cars & personal property. We're planning to get our will together for that.

DW is 6 years older, so we're planning to "go about the same time", but she's waiting for 70 for SS and then I'll go to at least 65 (preferably 70) for mine. We're still both <60, so we have some time to consider & make adjustments for most things. Also planning to do some Roth conversions and reduce the amount of accounts to 2-3 over time, both having a CC attached to each of our names as primary.

We've been dragging our feet on the will, so I may start the discussion since we are "snowed in" for a couple of days...

 

[JDARNELL]

.


Social Security

I believe the common wisdom is that the lower earning spouse should start taking their own benefit at 62 and the higher earning spouse take at 70. The lower earning spouse switches to spousal benefit at his or her full retirement age. That maximizes the later in life income for the survivor. .

Portfolio

Aside from aligning the portfolio with the above considerations, taxes are the main driver of this issue. When one of a couple dies, the survivor will be filing taxes single. All the marginal brackets are halved and, for the same income, taxes will be at a much higher rate. This consideration is, I believe, the primary driver of the Roth conversion strategy - to minimize the tax burden on the survivor -- but it comes at the price of paying taxes now.

*******



With respect to the Roth conversion issue, currently we pay 22% on Roth conversions right out of the box. I have run spreadsheets six ways to Sunday and they all show that converting within the 22% bracket, we simply cannot convert all our tax deferred money before RMDs arrive. The survivor will be in the 24% bracket, but will not move into the 32% bracket until age 90. Accordingly, we are only making modest Roth conversions now to provide a pool of money we can tap for unexpected costs without further tax consequences, the earnings on which we don't have to include in current income.


__________________

Can you discuss your decision on how much to convert to Roth in the 22% bracket? Are you filling it up to the top?

Following the original thread which prompted this thread from a couple of days ago I have come
To the realization that my wife and I will not be able to convert the amount in our T ira accounts before RMD time above the 22% bracket. With guaranteed pension which includes a 55% survivor benefit for her and SS today we start at the 22% bracket. The RPM spreadsheet level of planning has really opened my eyes from the overarching plan that we did 5 yrs ago.

 

[LateToFIRE]

Can you discuss your decision on how much to convert to Roth in the 22% bracket? Are you filling it up to the top?

Following the original thread which prompted this thread from a couple of days ago I have come
To the realization that my wife and I will not be able to convert the amount in our T ira accounts before RMD time above the 22% bracket. With guaranteed pension which includes a 55% survivor benefit for her and SS today we start at the 22% bracket. The RPM spreadsheet level of planning has really opened my eyes from the overarching plan that we did 5 yrs ago.

I too primarily use RPM for (pre-retirement) planning purposes and have been trying to apply some of my newly gained Roth Conversion understanding, having been schooled in the thread you referenced. I'm finding it difficult to model a scenario where we come out ahead on Roth Conversion until our latter years - even with tax-adjusting tIRA balances to try to make an apples to apples comparison of scenarios.

About age 83 seems to be the inflection point where conversion starts to come out ahead, but the benefits don't become material until around age 90, at which point if we're still kicking, LTC expenses would probably provide significant tax ded's anyhow.

I attribute this anomaly to some factors specific to my situation, similar to what you cited:

1) In the window where conversions would make the most sense,won't have much capacity in the 12% bracket, so would be making some conversions in the 22% bracket - not very tax efficient.

2) Our SS/pension income and taxable account balances will be more than enough to fund our expenses before (and after) RMD's kick in.

3) If I do $500K of conversions, it knocks about $1M off of total tIRA RMD's over a 15 year period, which seems like a nice benefit, but either way end up dying with very large tIRA balance, as do not require those funds.

4) If all goes according to plan (big IF) I also never need to draw on the Roth IRA, so don't realize on the direct benefit of having converted those funds.

I still do plan to do Roth conversions (have a couple years yet to decide), but rationale is more about removing some degree uncertainty on taxes, hedging against future tax rate increases, especially if one of becomes a single-filer, and creating a bigger pot of "tax-free" funds so we don't have to incur big lumpy tax hits to fund large one-time purchases/projects/expenses. Not so concerned about heirs tax-burden given half of estate would go to charitable institutions.

One other thing I did note in my analysis is that if the Roth funds are left untouched for a long period of time, the tax-free growth is substantial. On that note, RPM may not be well-equipped to optimize which accounts get drawn from and when. For example, rather than drawing down the taxable account, could be that later on should be drawing from the well-marinated Roth to reduce taxes [update: tried it, didn't make much difference].

It's a complex, troublesome analysis for sure, with tons of assumptions and wildcards. That's why I'm still planning to do some amount of conversions - to give us future flexibility given we don't have a crystal ball.

 

[Gumby]

We are not filling to the top of the 22% bracket. Just gradually working toward a half million in Roth. Once we get there, we'll likely stop. One factor for us that doesn't affect most people is that we have no children so we are not trying to maximize our estate. If it eventually goes to charity, it won't matter what type of account it is in.

 

[JDARNELL]

I too primarily use RPM for (pre-retirement) planning purposes and have been trying to apply some of my newly gained Roth Conversion understanding, having been schooled in the thread you referenced. I'm finding it difficult to model a scenario where we come out ahead on Roth Conversion until our latter years - even with tax-adjusting tIRA balances to try to make an apples to apples comparison of scenarios.

About age 83 seems to be the inflection point where conversion starts to come out ahead, but the benefits don't become material until around age 90, at which point if we're still kicking, LTC expenses would probably provide significant tax ded's anyhow.

I attribute this anomaly to some factors specific to my situation, similar to what you cited:

1) In the window where conversions would make the most sense,won't have much capacity in the 12% bracket, so would be making some conversions in the 22% bracket - not very tax efficient.

2) Our SS/pension income and taxable account balances will be more than enough to fund our expenses before (and after) RMD's kick in.

3) If I do $500K of conversions, it knocks about $1M off of total tIRA RMD's over a 15 year period, which seems like a nice benefit, but either way end up dying with very large tIRA balance, as do not require those funds.

4) If all goes according to plan (big IF) I also never need to draw on the Roth IRA, so don't realize on the direct benefit of having converted those funds.

I still do plan to do Roth conversions (have a couple years yet to decide), but rationale is more about removing some degree uncertainty on taxes, hedging against future tax rate increases, especially if one of becomes a single-filer, and creating a bigger pot of "tax-free" funds so we don't have to incur big lumpy tax hits to fund large one-time purchases/projects/expenses. Not so concerned about heirs tax-burden given half of estate would go to charitable institutions.

One other thing I did note in my analysis is that if the Roth funds are left untouched for a long period of time, the tax-free growth is substantial. On that note, RPM may not be well-equipped to optimize which accounts get drawn from and when. For example, rather than drawing down the taxable account, could be that later on should be drawing from the well-marinated Roth to reduce taxes [update: tried it, didn't make much difference].

It's a complex, troublesome analysis for sure, with tons of assumptions and wildcards. That's why I'm still planning to do some amount of conversions - to give us future flexibility given we don't have a crystal ball.

What you are seeing is what I am seeing. The break even is mid 80s for us as well. I don't see anyway that I am going to be in a lower bracket than the 22% I am now. I anticipate taxes will go up over time. The RMD requirements at 75 are brutal.

The money in the Tira and current Roth will not be needed. I think the exercise is about paying at little taxes over the lifetime of the funds for our heirs and charities. Filling up to the top of the 22% bracket seems the right thing to do or maybe even to the 2nd IRMAA bracket.

 

[JDARNELL]

We are not filling to the top of the 22% bracket. Just gradually working toward a half million in Roth. Once we get there, we'll likely stop. One factor for us that doesn't affect most people is that we have no children so we are not trying to maximize our estate. If it eventually goes to charity, it won't matter what type of account it is in.

That's true. Any reason to work towards the 1/2 million or is it just a number you picked? We do have two kids that are well on their way to getting launched. I suspect barring making a fatal mistake picking a spouse they will be on their way to FI on their own.

When doing Roth conversions though is there ever a reason to pick one spouse account over the other? If so why is it?

 

[Gumby]

No particular reason for 1/2 million. It just seems enough to handle any likely need for tax free funds.

 

[Sunset]

We are not filling to the top of the 22% bracket. Just gradually working toward a half million in Roth. Once we get there, we'll likely stop. One factor for us that doesn't affect most people is that we have no children so we are not trying to maximize our estate. If it eventually goes to charity, it won't matter what type of account it is in.

No nieces / nephews ?

Although I guess if just leaving some a token amount, there is still no need to optimize.
Probably best to leave bunch in IRA for charities, as I think they get them tax free anyways.

 

[HarveyS]

She had no clue where their money was, how much there was or any idea about investing or money management.

A good place to start is prior year tax form. Any accounts that paid dividends, interest or cap gains should be listed. Tougher to find 401k or IRA monies.

 

[Retired Expat]

Funny but none of the OP’s concern even came to mind reading the title.

Mine would be

1. Would I continue to live where we are? A house in the countryside of a country not my own.

2 as DW handles one side of our investments and they are the ones that require regular monthly activity would I dispose of them? I handle the bigger and more profitable aspects of our portfolio but have made them relatively hands off.

3 since we do so many things together how would I be able to do it all alone? Where will I find the drive and will to go on without her? Sorry, don’t want to get all maudlin but is a serious issue for those soul mates who are so key in each others lives.

Would I go back to work? Start a new business?

 

[LateToFIRE]

No particular reason for 1/2 million. It just seems enough to handle any likely need for tax free funds.

Funny, I picked $500K as well. $50K/year for 10 years feels tolerable in terms of the extra ~$10K taxes on the conversion amount. Also, nice round number. And by age 80 should hit $1M, and then $2M by age 90 if left untouched. Seems like plenty enough.

 

[LateToFIRE]

Funny but none of the OP’s concern even came to mind reading the title.

Mine would be

1. Would I continue to live where we are? A house in the countryside of a country not my own.

2 as DW handles one side of our investments and they are the ones that require regular monthly activity would I dispose of them? I handle the bigger and more profitable aspects of our portfolio but have made them relatively hands off.

3 since we do so many things together how would I be able to do it all alone? Where will I find the drive and will to go on without her? Sorry, don’t want to get all maudlin but is a serious issue for those soul mates who are so key in each others lives.

Would I go back to work? Start a new business?

Good Q's - Was thinking more about the financial aspects of the issue but emotional and financial are of course interrelated.

 

[brett]

Good Q's - Was thinking more about the financial aspects of the issue but emotional and financial are of course interrelated.

I believe that the financial aspects of the issue are by far the easiest to plan for and to deal with.

All that is required is to spend some time, exercise some forethought, and then act accordingly to arrange your finances.

 

[iloveyoga]

I believe that the financial aspects of the issue are by far the easiest to plan for and to deal with.

All that is required is to spend some time, exercise some forethought, and then act accordingly to arrange your finances.

I totally agree on the financial aspect. I just walk though the steps of what each would have to do. Our situation is fairly simple so that helps. It would be much easier for me because I handle now, but very doable for DH. And neither should have to worry about having enough $$.

As mentioned above, we have been together so long and spend so much of our time together, that is the part I can't really plan for or help DH with.

 

[ncbill]

print out paper copies of your tax forms.

am now trying to help a widow whose spouse died suddenly end of last year.

paper tax forms are nowhere to be found

hopefully they'll be on his laptop, which i think she was finally able to get into.

btw, the smartest thing her late spouse did was to have a modest life insurance policy.

she was advanced 10% on notifying the insurer of his death and got the rest as soon as she sent them the death certificate.

still hasn't been able to get to the will which is probably in the safe deposit box.

but the bank is dragging its feet on sending someone to inventory for probate...they apparently don't let their branch people do that.

 

[jollystomper]

What we have done is:

1. (Me) Simplify our financial assets to reduce the number of institutions one would have to deal with. This includes keeping enough in cash so that asset changes will not be required for 5+ years.
2. (Both) Update our wills, including medical proxies, POAs, estate executors, and clear post-death instructions.
3. (Me) Create a shared environment for documents that both we and our children can easily access. It is a combination of both online and in-house repositories.
4. (Both) Document and share as much information as possible - assets (financial and major material) and locations, debit accounts, bills and payment methods, etc.
5. (Me) Update yearly, review with DW, notify kids of updates.

For DW, the key things I have answered in this planning are:

- She will not have to work, and can take time with our financial assets.
- The house is paid off, and she can take her time deciding what, if anything, to do with the home (and we have several trusted realtors as friends)
- She knows what the legit bills are and when and how they need to be paid (especially the home property tax bill).

 

[gauss]

Financial strategies that we employ include

#1) 100% survivor-ship option selected on both pensions
#2) Roth convert almost all the tax-deferred funds while in the age 50's and 60's decades.
#3) Both delay SS until age 70
#4) Group Term Life insurance maxed out to cover the loss of the 2nd SS payment.
#5) Spending assets at less than 2% rate.

-gauss

 

[Koolau]

I'm starting with the assumption that I will go first (more health issues than she has and I'm male vs female.) IF she goes first, I'm screwed, tax wise. Might have to find a lady in similar straights and form a marriage of convenience to lower our tax rates... NAAAAHHHhhhhhh!

So... Here is what we've done up to now.

What I probably did wrong:

1) She signed away her right for 1/2 of my pension when I die. That was the most she could have had - 50% survivor benefit. Instead, she will get 1/4 but we've had an increased monthly benefit for that "mistake." It's only a modest pension (about 40% of my final salary.) So it was likely a "modest" mistake in hind sight.

2 I maxed out my 401(k) to the near exclusion of taxable savings. I have maybe 10% of stash in taxable. Everything else is Roth or 401(k). That leaves very little flexibility. And it leaves very little for her to use for expenses and to pay taxes when the "need arises" and her tax rate goes up. I'm hopeful that low taxable investment will be an advantage if she ever exceeds the NIIT MAGI. I've not yet studied that closely.

3) I only bought one Whole Life policy (which I paid up.) Back when I was insurable, I probably should have gotten double the Whole Life. It is very tax friendly to the surviving spouse - and can go far in limiting how much money (beyond RMDs) needs to be withdrawn from the survivor 401(k). Of course, back then, that would have likely meant less 401(k) savings - which I'm guessing would have been a good thing (ask me in 20 years.)

4) Our I-bonds are a tax bomb of their own. I probably need to start cashing them in a few at a time. Waiting for them to mature means a big tax bill - just when RMDs are approaching a big tax bill all their own. GAAAACCCKkkkkk!



What I hope I did right:

1) We converted his/hers tIRAs to Roths when we were young (you know - in our 60s.) Roth's are very tax friendly ONCE you convert them. So roughly half our combined stash is in Roths and most of the other half is in a 401(k). RMDs are creeping up and we're also "living" off our 401(k) - IOW attempting to lower it's value to decrease the impact once I pass on. Of course, with all our efforts (extra withdrawals up to IRMAA level 1 limits) the 401(k) is still growing!

2) She claimed SS at 62 and I claimed at 70. She'll get my full SS when I kick.

3) I have one paid up Whole Life policy - it has a rider that she or I can use it for LTC. It would easily cover a couple of years of her expenses beyond SS and pension.

4) I have two universal policies that I plan to keep up until they get too expensive. I'm trying to figure a "break even" on them (how long should I keep adding cash to them??.) I start with my relatively "poor health" making the policies a "good bet" for me.

5)She dropped her universal policy that had an aggressive cash growth (participation in the market - it grew to more than the policy face value!) She 1031'd the cash into a MYGA. We'll likely roll that into a new MYGA or live large off the only-partially taxable proceeds.

6) She has one small universal policy that, so far, we're keeping up as it's a good bet with her relatively poor health. Heh, heh, it would be just enough for her final expenses AND to move me back to the mainland if I were to choose to do that.

7) We're naturally frugal - she will have "enough" almost no matter what (barring black swans.) Of course, she'll likely pay a lot higher tax rate than we ever have together. THAT's the one area I hope to address.

8) I over-saved (see 7.) Our combined stash (mostly from my earnings) will take her beyond 100 (black swans not materializing.)

9) Condo is paid for - she'll always have a place to live and she could live like a queen if she moves back to the mainland. Old stomping grounds is ACOL area. I mean, like right on the USA average. My SWAG is she could live on 25% of what we spend now. BUT that doesn't address taxes or things like IRMAA or just maybe NIIT - more study needed.


Critiques and suggestions welcome since YMMV.

 

[gauss]

print out paper copies of your tax forms.

am now trying to help a widow whose spouse died suddenly end of last year.

paper tax forms are nowhere to be found

hopefully they'll be on his laptop, which i think she was finally able to get into.

btw, the smartest thing her late spouse did was to have a modest life insurance policy.

she was advanced 10% on notifying the insurer of his death and got the rest as soon as she sent them the death certificate.

still hasn't been able to get to the will which is probably in the safe deposit box.

but the bank is dragging its feet on sending someone to inventory for probate...they apparently don't let their branch people do that.

Did she look at the county probate court to see if anyone filed the will there for safekeeping? It is a fairly common practice.

-gauss