Planning challenges for surviving spouses, part 1

This topic comes to us from my dear friend Lee -- I always appreciate ideas for the column. Lee suggested we discuss some of the planning challenges experienced by surviving spouses after the death of a husband or wife. This is an important topic and will require two weeks of columns to address.

This is a subject we deal with regularly in my practice and there are some common threads, beyond the grief and emotional facets of this type of loss, presenting financial planning issues needing to be addressed.

The first lesson I discovered some time ago is that after the loss of a spouse, the most appropriate professional approach for my team to employ when helping a newly widowed spouse is simply patience. Grief is an incredibly powerful force, impacting each of us differently, both inwardly and outwardly. For some in my observation, grief speeds up perceptions of time; for others grief can slow time to a seeming halt. As a planner, my first response to this type of tragedy is to simply slow down.

We attempt to counsel no big decisions, financial or otherwise, right away. Yes, when someone passes, certain "housekeeping" tasks need to be completed, but these tasks don't necessarily require immediate material changes.

With time, however, after the cloud of grief becomes less opaque, some decisions will likely be necessary. For purposes of this discussion, we will use a frame of reference of an older couple, already retired, using standard mortality ages of 79 for a male and 86 for a female in the United States. We will also assume an average age difference between spouses of 2.5 years, with the male being older -- which is also statistically consistent in the U.S.

Using these statistical guidelines indicates a surviving widow can expect to survive her husband by 8.5 years -- not an insignificant period. The primary challenge typically needing to be addressed first is a reduction in household income.

According to the Social Security Administration, Social Security provides roughly 50% of household retirement income. The amount of Social Security benefit received by retirees is based on an individual's earnings history during their working years. In addition, spouses married for at least one year are eligible for a spousal benefit based on the earnings history of the higher-earning spouse -- up to 50% of the earned benefit of the higher-earning spouse. If both spouses earned sufficiently to qualify for Social Security benefits of their own, the benefit amount will be the higher of the spousal benefit or the earned benefit of the spouse with the lower earnings record.

The ultimate benefit amount paid by Social Security is impacted by the age benefits are claimed and can become quite confusing. What is not confusing: when a spouse passes away, the surviving spouse will move to the higher of the two household benefit amounts, which means one of the income benefits will cease.

In my experience, this change in benefits typically reduces household income by 20% to 40% and can leave a large hole in household operating budgets which often exceeds the amount of household cost reduction associated with the deceased spouse.

The first step in planning for this scenario is awareness. Using experience and some reasonable planning assumptions, a value can be put on the income risk associated with mortality. The average Social Security spousal benefit is about $1,000, while the average Social Security earned benefit is about $2,000. So, for planning purposes we will assume our planning household will experience an income reduction of $1,500 a month at the death of the first spouse.

Using simplified math, we can project the total cost of this reduction for the surviving spouse over 8.5 years at $18,000 a year -- totaling $153,000. Apply a 4% present value calculation for a couple entering retirement at age 65 and the math says roughly $90,000 of "retirement age" value is needed to address this risk.

I am not saying $90,000 has to be sequestered away for this purpose, nor am I suggesting life insurance in most situations. What I am saying is that retirement planning and spending scenarios can be structured to preserve the likelihood of this amount being available to provide for the surviving spouse later in life. But in order to do so, the concept must be understood and addressed -- and the earlier the better. Next week we will continue this conversation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.