A newly released study indicates that we’re likely to live much longer than we imagine. Males can now expect to live 85.99 years and females 87.97 years. But the real surprise, and the one that makes joint planning so important, is the fact that a 65 year-old couple should expect that one of them will live to 91 years of age. This is great news for those who want to spend more time with their kids and grandkids, but it can cause some real problems if a couple hasn’t planned well for this possibility.
Retirement Income Is Likely To Decrease
The goal, of course, is to leave the surviving spouse in good shape financially. This might seem like a no-brainer, but it may be harder than you think. After the death of a spouse, the survivor many times sees a permanent decrease in his or her income. The survivor will only have one Social Security check coming in. Many pension plans – both those in the private sector and those in government service – will reduce or eliminate the deceased spouse’s pension payments and/or medical insurance coverage at the death of the spouse who was the former employee. Longer life spans also mean that the survivor is much more likely to experience a period of disability, which will impose additional costs on them at a time when income may be decreasing. For all these reasons, and more, it is critical that couples make wise retirement planning decisions.
Prepare Your Lifeboat Now
The good news is that it doesn’t take a rocket scientist to successfully plan for retirement as a couple or as a surviving spouse. One of the keys here is to make sure that both spouses are fully aware of their financial situation and are comfortable handling their finances. The time to learn where everything is or to learn how to manage is not when you’ve lost the love of your life and are already dealing with the grief of that passing.
You may be tempted to automatically think that you’re O.K., but a recent survey found that 40% of married couples rely extensively on one spouse to make and manage financial decisions. This potentially puts the other spouse at a disadvantage if they have to step in and manage with limited knowledge or experience. So, what’s to be done? Well just like going on a cruise, you need to ready your lifeboats before they’re needed. Talking about these things, keeping each other up to date and making joint decisions are the keys to a successful plan and future.
Pension Payments And Social Security
If one of your employers offers you a pension, think very hard before you select a pension payment option. Most pension plans will let you take a lump sum payment in lieu of accepting monthly pension payments. In many instances, taking the lump sum makes more sense than taking the monthly payments. For those who are willing to take control of their investments and can stick to a few basic, common-sense investment rules, you will typically earn more than the pension company is willing to pay you.
If you do decide to take the monthly payments, it often makes sense to take the 100% joint and survivor option. Pension plans usually provide you with several payment formulas. The ones that look the most attractive are usually the ones that promise to pay the most immediately. The bad news is that when the first spouse dies, the monthly payment to the survivor drops significantly or sometimes disappears altogether. The 100% joint and survivor option means that the monthly payment will remain the same regardless of which spouse lives longest.
Social Security is another area where some critical thinking may pay handsome rewards in the future. If you are over 55 years of age now, the odds are overwhelming that you will receive Social Security payments. Avoid the temptation to start taking those payments the minute you’re eligible. That may be the right thing to do, but it may not. The longer you delay taking your benefits, the higher the payment amount becomes. As of this writing, you are allowed to start when you turn 62, but you can delay until 70. You need to take a hard look at the difference in benefits before deciding when to start taking the payments.
Life Insurance At My Age?
Life insurance may provide a very useful benefit. While we’re not advocating that retirees run out and purchase life insurance, we are recommending that you consider your options before cashing in any insurance you already have in place. Too often, retirees figure that they don’t “need” the life insurance anymore simply because they stopped working and have some retirement savings in place. They see the cash value that’s built up over the years and quickly opt to surrender the policy and take the money. There are many times this makes sense, but there are just as many when it doesn’t. For some retirees, having a sizeable death benefit ready to aid the surviving spouse is exactly the tool which will offer the survivor the most security. You need to consider your options here very carefully.
Withdrawal Rates Are Key
Lastly, to the extent possible, try not to withdraw any more than 5% from your retirement savings, IRAs, and/or 401K plan assets. Simply add up all the retirement accounts you have and multiply that number by 5%. The result is the amount you should be able to safely withdraw and still have confidence that your accounts should survive the ups and downs of the market. Is it possible to withdraw more and still survive? Yes, but it takes some sophisticated planning to determine that in each couple’s unique situation. If you’re not going to take the time to do that planning work, the 5% withdrawal rate is a pretty good number to use.
Financial Security Is Possible
As with so many pronouncements we make about the future, this one is probably going to be wrong the minute you read it. Medical science is constantly working to increase our lifespans, so the odds are great that many readers will in fact live even longer than what’s projected now. That just places more importance on joint planning. The good news for so many couples is that retirement can indeed be a financially secure phase of life. You just have to go into it with your eyes wide open.