Planning for retirement after losing a loved one

Janet became a client of mine a few months after she lost her husband, Larry, to cancer. Larry managed all of the finances. It was difficult for Janet to not only lose the love of her life, but all of a sudden face the burden of major financial decisions on her own. Unfortunately, Larry was a “do it yourself-er,” so she never worried about getting involved in what he was doing with their money. He did quite well, but he had accounts all over the place, investments that made no sense to her, and she was left picking up the pieces to figure out how this fits with her long term reality of potentially living another 25+ years. Her Mom lived until 98 years old, and at only 62, left me to believe she could very well live another 30 years, or longer.

When Janet first came to me, I told her to not worry about any long term decisions or investment vehicles. She needed to do one thing at a time, which I’ve outlined below, in hopes it might help others going through a similar situation. 

Step 1: Set up a meeting with the estate planning attorney.

Thankfully, Larry did have a proper will established and had named beneficiaries on his retirement accounts. If there was no will or estate plan established, we would’ve had to contact an attorney to discuss the process for intestacy laws (dying without a will) in her state.

Step 2: Inventory the assets

Larry had a few 401ks, an IRA, a ROTH IRA and a deferred annuity. They also had a few non retirement accounts together including a checking, savings, a few CDs and a brokerage account.

Thankfully, all of the 401ks, the IRAs and the annuity had Janet listed as primary beneficiary. The first order of business was to contact each of the financial institutions to have them settle the accounts to her name. Unfortunately, there were seven different companies to call. This created a bit of a headache, as we all know how long it takes to simply get someone on the phone these days. She was able to sign some forms, provide a copy of the death certificate, and get the accounts settled in her name within a few weeks. Her husband was 65 years old, so he was not taking any required minimum distributions (“RMD”). Therefore, she received the funds in her name only so we could use her age for RMD purposes. There are other ways to inherit retirement accounts as a spouse, but this was the cleanest and most tax efficient for her. The contingent beneficiaries on these accounts were their two children, who are now primary beneficiaries  if Janet were to pass away.

The annuity was the only slightly complex product. It required her to liquidate the account within 5 years, or turn the account into a life annuity. It was an easy decision from a planning perspective and we decided to annuitize the portfolio. This allowed her to replace some of the lost Social Security income from Larry’s passing away with guaranteed income for life.

The taxable accounts (checking/savings/CDs/brokerage) all had joint ownership, so we were able to settle the accounts to her name fairly easily.  If you are dealing with a situation where your deceased spouse was receiving a pension or Social Security, you might want to hold off on removing them from your account right away.

Some financial institutions do not allow a “Transfer on Death” instruction for joint tenants by Entirety accounts, which did apply in this situation. Therefore, now that these accounts were individually owned, we simply added a “Transfer on Death” instruction to be her two children, so those accounts could avoid probate. This is a similar solution to having primary beneficiary designations on retirement accounts, life insurance and annuities.

Step 3: Update Insurance policies

A quick review of bank statements and credit card statements can make sure you are covering all of the insurance companies that you currently pay premiums to. This was helpful for Janet as Larry did all of the bill paying. We reviewed her statements and identified two different carriers to call and make sure policies were updated to be in her name only. This included homeowners, auto, RV, liability, and flood insurance.

Make sure to keep detailed notes when calling in to these different vendors. Write down who you spoke to, when you spoke to them, and a case ID #, if possible. This should apply to the future steps as well so you don’t lose track of everything you are doing.

Step 4: Contacting his employer

We were able to get in touch with a contact at HR to inform them of Larry’s passing. They were able to assist with confirmation of life insurance death benefits he had through the group coverage, as well as assist with health insurance coverage. Janet was covered under Larry’s plan, so under COBRA rules, she had the option to continue the policy for up to 36 months. Some companies make the surviving spouse pay for COBRA entirely, which makes it quite expensive. We found it more advantageous to shop on the Affordable Care Act plans to look at policies until she turns 65 (Medicare eligible). In both scenarios, you need to make sure you enroll within 60 days of the triggering event, in this case, death of the insured. This is a helpful resource to understand healthcare options with the ACA.

Step 5: Audit the bank statements

As I mentioned in Step 3, we combed through her bank and credit card statements from the previous 12 months. This ensured we did not miss any of the recurring or non recurring bills that were paid monthly or annually. Additionally, it allowed for us to get a sense of her monthly cash flow needs that were “fixed” vs “variable” costs, which was critical when running longer term retirement projections later in the process. It was also a great opportunity to cut expenditures that were now unnecessary. Some people have the misconception that if you lose a spouse, your expenses will go down by 50%. However, studies have shown that costs only go down 20% when you lose a spouse. This also makes it challenging because Social Security is likely cut significantly because you will only claim ONE of the benefits (not both). We will talk about Social Security in the next step.

This did take some heavy lifting as we had to reach out to these vendors to make sure Janet was now the primary bill payer/account owner and to inform them of Larry’s passing. This process took a few weeks, so don’t stress about doing it all at one time. Also, be prepared for lots of red tape. It might seem straight forward to cancel a contract for your now deceased spouse, but be prepared to deal with the corporate bureaucracies.

Step 6: Review Social Security

Larry was the primary breadwinner and had built up a nice Social Security benefit. In fact, he was scheduled to receive about $2,820/month at Full Retirement Age (66). As a regular spousal benefit, Janet would have been able to claim 1/2 of Larry’s benefit, or $1,410/mo at her Full Retirement Age (66 and 6 months). If you add those two together, that would have been $4,230/month in total Social Security benefits. However, as a surviving spouse, the options are slightly different.

She had the option to start Social Security right away at her age 62 (and could have as early as age 60). We decided to delay until her Full Retirement Age (66 years and 6 months) to increase her monthly benefit to 100% of what Larry would have received. If she had taken the payments at 62, she would have only received about 75% of his full benefit. Some survivors have the option to take Social Security as a widow/widower, and then switch to their own Social Security benefit as early as 62.

There could be reasons to take Social Security right away as a widow or widower. This could include health considerations where you might not expect to live very long. It could also be the fact that income will be needed right away and drawing from the investment portfolio too early could become a risk for later in life. However, in Janet’s case we will likely delay Social Security to her Full Retirement Age.

There are two reasons for this.

1. She has longevity in her family and she is in great health. Therefore, there is good reason to believe she will live long enough to reap the rewards of delaying Social Security.

2. She has cash assets and non retirement assets that we will draw on for income prior to taking Social Security.

I always recommend running a few hypothetical scenarios to determine how long you would need to live to “break even” from delaying Social Security. Also, what is your rate of withdrawal on the portfolio if you delay Social Security vs. take it right away. It also helps to understand the longer term objectives of the client as well to make the best decision possible.

As a survivor, you have to book an appointment to review all of your options, and the number is 1-800-772-1213.

Step 7: Begin to think about long term financial planning issues

Now that short term objectives were completed, it was time to think longer term.

Janet did want to maintain her lifestyle, stay in the house and travel often, but did not want to be a burden on their two adult children. This was a big reason we turned the deferred annuity we discussed into a life income stream. There are many negative connotations associated with annuities, but it’s the only financial instrument outside of a pension and Social Security that can guarantee income for life. When you add Social Security on top of her annuity income, it pretty much covers her basic living expenses. She can have that peace of mind knowing she will always have her basic needs covered with guaranteed income, regardless of what happens in the stock market or with her assets.

With that being said, she absolutely wanted to continue to spoil her grand kids, travel the world and give to charity. By building these variable/discretionary expenses into the projections, we could then identify what a reasonable withdrawal rate from the portfolio would be. Given her extremely conservative nature when it comes to investing, we decided to position the portfolio to what I would characterize as “moderately conservative.” Not too conservative where she would have significant inflation risk, but conservative enough to where she would not be losing sleep over another recession or bear market. This was a major difference in Larry’s philosophy of being more aggressively invested. It took some time to trim some of his positions and re-balance the accounts, but ultimately it reduced a lot of anxiety as she never liked how Larry would complain every time the stock market went down.

We decided to pull roughly $50,000/year from the portfolio, which equated to about 4% withdrawal rate/year on average ($1,250,000 portfolio balance). We decided to take all of the distributions initially from her non retirement accounts to allow for additional tax deferral and tax free growth on the IRAs and 401ks. Once she turns 72, she will then be forced to take the RMDs from the those retirement accounts (except the Roth IRA), which will then reduce the amount she will take from the non retirement accounts.

The final issues were two “what-if” scenarios:

“What if there was a need for long-term care expenses?”

“What if she was incapacitated and could no longer make healthcare or financial decisions?”

The long-term care issue was tricky. She had some negative experience with insurance, so talking her into buying long-term care insurance was virtually impossible. However, she did understand that she did not want to rely on moving in with the kids or becoming a burden on them. We stress tested the scenario of self-insuring, which we estimated might cost around $300,000. This is a complete stab in the dark because of the uncertainty of needing care, how extensive that care might be, as well as how long she would need the care. However, we used this figure based on studies done by Genworth and AARP. The conclusion was that she could in fact self-insure, but it would be a significant detriment to her legacy goals for the children and grandchildren, as well as become a significant tax burden given she would have to burn through primarily retirement assets to pay for the care. She ultimately decided to buy a policy that would cover $3,000/month for 3 years and costs her roughly $200/mo in premiums. By no means would this fully insure her, as the total benefit pool is only $108,000 ($36k/year x 3 years). However, the long-term care insurance benefits would be tax free, so it would reduce the tax burden of a long-term care event as well as preserve the legacy goal she has for the family. This was a nice happy medium for her.

I am agnostic about buying insurance or self-insuring, but I am adamant about having a plan. I have some clients that have no desire to leave a financial legacy, and are completely fine with using their assets to pay for the care. That is completely acceptable. The key is to stress test the hypothetical scenarios and see how to best protect against the risk, because the reality is 70% of those 65 and older will need some long-term care services in life.

Finally, we had the power of attorney decisions for healthcare and financial. In their estate plan, they had named each other as their powers of attorney. However, now that Larry is no longer here, she needed to rethink who to assign which duties. Thankfully, her two children get along very well. She named the daughter as healthcare power of attorney and her son as financial power of attorney. There were reasons for this. The daughter is local and could be physically present much sooner than her brother. Her son is extremely financially savvy and would be very comfortable if he needed to step in.

I’ve had situations where the children don’t get along, or they may not be trusted when it comes to managing money, and it becomes very complex who to name for these important roles. In some instances, naming a third party or corporate trustee, could be beneficial (if a trust is involved).

I always advocate setting up a family meeting to make sure each person knows what their roles are and are not. Janet’s children were very happy to know that their Mom had a financial plan, the balance sheet was organized with purpose, and her long term prospect of maintaining her financial independence was very strong.

Overall, this process had lots of ups and downs, it was emotional and it was burdensome. We organized her balance sheet, settled accounts to her name, reviewed and updated her budget, decided on a Social Security strategy, and finally long term retirement planning. I always tell people to make sure they have someone or some people they trust. As a fiduciary, I take a lot of pride in sitting on the same side of the table as my client, and they rest assured there are no conflicts of interest in our relationship.

If you, or someone you know has recently lost their spouse and needs help planning for retirement, you can schedule an introductory call or by contacting us at [email protected]

Kevin Lao

I am the founder of Imagine Financial Security. We are a Flat Fee, Fiduciary Financial Advisor based in Jacksonville, FL. We specialize in retirement planning for blended families, tax optimization and investment management. We can work with you locally in Jacksonville or St Augustine, as well as virtually anywhere in the United States.