Retirement Planning for the Surviving Spouse

Right now, the last thing you and your spouse want to talk about is what happens to the survivor's financial security when one of you dies. You'd rather share dreams of the fun you're going to have spending your retirement money together.

But facing this tough issue now and making plans for it will bring a peace of mind that lets you enjoy your retirement that much more.

Here are six tips to ensure your surviving spouse will have enough retirement income to live on when you're gone.

Consider your spouse
Take financial inventory. Patrick Astre, a Certified Financial Planner in Long Island, N.Y., and author of "This Is Not Your Parents' Retirement," says couples neglect this essential step far too often.

"First you have to see what you have," Astre says. "Sometimes there just isn't enough to protect anyone."

Cindy Hounsell, president of the Women's Institute for a Secure Retirement, or WISER, suggests that couples sit down together and make a checklist of the income that will exist before and after the death of each spouse.

"When people are thinking about retirement, they have to think about where the income is going to come from, and which pieces are going to last for the rest of (their) lives," Hounsell says.

If your spouse has retirement assets in his or her own name, include it in the mix, and factor in whatever life insurance policies you have with your spouse as the beneficiary.

"Most public employers are going to offer some amount of life insurance benefits, separate and apart from the pension fund," says Keith Brainard, research director for the National Association of State Retirement Administrators.

If you don't have life insurance, consider whether you need to buy it for extra spousal protection. "If you die, your spouse gets the IRA, but is that going to be enough for him or her?" Astre asks.

However, if you're going to buy life insurance, do it before you retire. As you get older, life insurance becomes much more expensive, and the available policies usually won't offer much coverage, he says.

Learn the pension rules
Depending on where you work and what type of pension plan you have, the law may require that a survivor's benefit be made available to your spouse. Accepting this benefit generally means the amount of money you receive during your lifetime is reduced, but without it the retirement checks stop coming when you die.
Private sector employers and unions offering traditional defined benefit pension plans fall under the federal Employee Retirement Income Security Act, which mandates the provision of an annuity to the surviving spouse. You may waive this benefit, but only with the signatures of both you and your spouse on a form witnessed by a notary or plan representative.

If you want the survivor's benefit, you'll choose what's called a joint and survivor annuity payment; if not, you'll select the single life annuity.

Different -- and widely varying -- regulations apply to defined benefit plans for local, state and federal government workers; military personnel; and employees of churches and church-related agencies. Take state and local government retirement systems, for example.

"A common element among state and local government pension plans for survivor's benefits would be payment of the choice of a lump sum or an annuity for the spouse or named survivor," says Keith Brainard, research director for the National Association of State Retirement Administrators.

Beyond that, Brainard says, the details of what each plan must provide "run the gamut," so your best bet is to find out what the laws in your own state or local area require.

For example, those who retired before 2000 under the Missouri State Employee Retirement System have a free survivor's benefit amounting to 50 percent of their pension, meaning their monthly pension payment is not reduced to pay for the spouse's benefit. Not so for retirees who fall under the new plan, who must trade a cut in monthly benefits for a joint and survivor annuity.

The Delaware State Employees' Plan provides a free 50 percent survivor benefit and an option to increase it to 75 percent in exchange for reducing the retiree's monthly pension by 3 percent.

Defined contribution plans, such as 401(k), profit-sharing and stock option plans, are not required by law to include a survivor's annuity. However, spouses are the presumed beneficiaries of these retirement accounts, and your spouse must consent in writing if you want to leave the assets to someone else.

Consider Social Security options
The Social Security spousal benefit, which pays up to one-half the retired worker's benefit while he or she is living, discontinues when that worker dies.
However, widows and widowers who are at full retirement age or older get 100 percent of the deceased retiree's full benefit or their own -- whichever is larger.

"A lot of people don't know that you only get one benefit when the spouse (dies)," says WISER president Cindy Hounsell.

Those who are younger receive reduced survivor's benefits at varying increments, depending on their age.

For example, a 60-year-old widow's benefit would be reduced by 28.5 percent, says Social Security Administration spokesman John Johnston. "The longer she waits, the higher (amount) she gets," Johnston says.

Once she reaches full retirement age, she'll have the option of switching to her own full benefit if it's higher than the reduced widow's benefit that she'd been receiving.

Keep in mind at the outset that the amount of your Social Security check depends on your age at the time you begin drawing the benefit: It's lower if you elect to start receiving checks at 62 than if you wait until full retirement age. If you wait until age 70, your benefit will be even higher. However, there's no advantage to waiting beyond age 70 to begin collecting Social Security.

Plan for future circumstances
Once you've determined what income streams you already have in place, consider what you and your spouse will need in the years ahead so you can make plans to fill the gaps. Be sure to take stock of your heath, the possible long-term care needs of both you and your spouse, as well as the rising cost of health care, Hounsell advises.
Research from the Employee Benefits Research Institute reveals that while 41 percent of current retirees are able to get health insurance through a former employer, many employers are cutting out coverage for future retirees.

According to EBRI senior research associate Paul Fronstin, coverage of spouses is usually available for retirees who receive health care benefits from their former employers. Some plans continue to cover the spouse after the death of the retiree, while others do not.

"I don't know if I've ever seen statistics on what percentage of plans would cut off family members after a retiree dies, but it's totally up to the plan," Fronstin says.

For high-income couples, consider the impact of estate taxes on surviving spouses, says Bruce Fenton, managing director of Atlantic Financial in Boston. "There are some sophisticated life insurance products that have ... tax deferral benefits," he notes.

For example, variable universal life insurance policies can be designed to provide tax-advantaged income during retirement, in addition to the death benefit. These are complicated insurance instruments, so be sure you understand whether they make sense for your particular situation by talking to a knowledgeable, unbiased financial planner who doesn't get paid by commissions.

Consider pension maximization ... carefully
If you choose the single life annuity over the joint and survivor annuity, you can use some of the extra monthly income to purchase life insurance. Then if you die first, the proceeds from the life insurance can be used to buy a lifetime annuity for your spouse. This strategy is known as pension maximization.
If you pick the right policy and your health is good, pension maximization is a good bet, author Patrick Astre says. "If you are in poor health," he says, "the (insurance) rates are going to be so high that it's not going to work."

Astre warns early retirees considering pension maximization that "there's a lot of life left to cover."

"If you're retiring at age 55, and you have a spouse roughly the same age, then you've got another 30 to 40 years of life to cover," he says. "It's very expensive to provide enough to cover 40 years of life at the same income." According to Astre, that cost is likely to be more than the additional monthly income you gain by selecting a single life annuity.

One solution: Astre prefers using a combination of insurance policies, instead of just one.

He estimates that a healthy, 55-year-old woman could purchase a term policy for $1,578 per year and a whole life policy for $4,878 per year, for a total outlay of $6,456.

"We would use two policies: a $373,000, 20-year guaranteed term and a participating whole life policy (which pays dividends) for $187,000," Astre illustrates.

"The whole life policy is usually paid off by the 20th year," Astre says. "So by age 75 you don't need the term anymore, the whole life policy is paid off, and from then on, you've got your whole pension. If you live to your actuarial age, which is the mid-80s, then it works out."

Get some good advice
A research report indicates that while most retirees say they have a strong desire to consult a qualified professional to help manage their retirement savings plans, they are actually more likely to ask family and friends for advice. And that can get them into trouble.
"Family and friends most often do not have the skills to help someone plan for the financial aspects of retirement, nor do they always act selflessly when advising loved ones regarding financial issues," says "Public Misperceptions About Retirement Security," a report by the Society of Actuaries, LIMRA International and Mathew Greenwald & Associates.

If you have a defined benefit pension plan, your plan administrator can be a great source of information, and should be able to show you how each benefit choice will affect you in terms of dollars and cents.

And if you have squirreled away retirement savings in a combination of 401(k) plans and IRAs, it would make sense to seek out an unbiased, fee-based financial planner to get some projections of how long your funds will last. A good adviser can even help you finesse your approach to that doubly awkward money-and-death conversation you and your spouse need to have.

"It's nice to have an objective, professional guide to walk you through it," says Atlantic Financial's Bruce Fenton.