The world lost one of its greatest and most accomplished basketball players on Sunday, January 26, 2020. Early in the morning, Los Angeles Lakers legend Kobe Bryant and his 13-year old daughter, along with seven others, died when the helicopter they were in crashed amidst foggy conditions in the hills of Calabasas, California. Kobe was 41.
Losing a spouse brings grieving and heartache enough without the unanticipated leap into the deep end of personal financial management. And Kobe’s death reminds us that if your spouse were to die, you have special considerations when planning your financial future.
Most Surviving Spouses are Women
Most women understand too well the odds that later life might find them alone financially. Among baby boomers, for example, an estimated 7 out of 10 wives will outlive their husbands. If you’re one of these women, how do you prepare?
Research shows that the average American woman lives almost five years longer than the average U.S. man. According to the Women’s Institute for a Secure Retirement, half of all widows become so by age 65. Vanessa Bryant became a widow at the age of 37.
More than 700,000 American women are widowed every year, according to the latest U.S. Census data, and widows are more likely than their male counterparts to lose income after a spouse’s death.
When your husband dies, you may have to dive into dealing with the murky waters of probate to validate a will, as well as many other legal and financial issues. In many marriages, the husband handles tax and financial issues – and understanding these new and confusing challenges can be overwhelming.
Acquiring enough financial knowledge to make money decisions confidently goes a long way toward easing the transition if you lose a spouse.
Plan and Re-Evaluate
Even when a death causes no new considerations for the surviving spouse, personal finances can still be a jigsaw puzzle difficult to fit together. Dealing with the death of a spouse can be overwhelming by itself but generally there is no need to make urgent money decisions.
Think Logically About Priorities
What does your financial plan look like? Re-evaluate what you value, what’s important to you, the purpose of your money. You might change your goals or timelines for what you and your deceased spouse planned. You might also reconsider how and where you want to live. This reset of your goals and how you want to deploy your money also helps you think of what-if scenarios to identify where you enjoy financial flexibility or where your long-term planning has stress points.
Analyze Cash Flow
Address changes to your income and budget before you consider more complex investment, insurance and tax issues. One needs to understand changes to their Social Security income and possibly survivor pension payments and if either relate to expenses. With month-to-month basics understood, you can then explore rules for inheriting investment accounts or insurance proceeds, and how to put these resources to work smartly.
Review your Investment Strategy
Maybe your investment objective differs enough going forward that you must revise investments to fit your new plan.
Even though one might feel they have a good handle on their finances, many may benefit from the help of professional advisors.
Maximize your employment benefits!
Open enrollment for employee benefits kicks off this month. While you plan your Thanksgiving menu, review your benefit choices.
Here are some pointers:
Even if you carry the same plan as in many past years, spend a few minutes evaluating which one is best for you and your family when you choose – especially high-deductible health plans and traditional plans. Switching from the traditional plan to a high-deductible option might save money if you don’t visit the doctor much. Perhaps too your spouse’s company now offers a better plan and you can switch the family coverage to the better alternative.
Improved employer plan descriptions lay out plans’ differences and costs, and do that much better this year. Take advantage of their free help, online or in person.
Often you receive only one choice for dental coverage, but you may be surprised at how many people decline to pay the relatively small premium for this coverage. Even if young and cavity-free, you take care of your teeth now to potentially prevent large dental bills in retirement. If nothing else, dental insurance provides a teeth cleaning twice a year.
This benefit works great if you wear glasses or contacts and need regular eye exams. Those with perfect vision may opt out of this coverage.
Most employers offer some basic life insurance, the coverage usually a multiple of your salary. If you are married, own a home or have kids, this basic coverage falls short. Pay extra if possible to increase life coverage through your employer. If that’s not an option, consider supplementing this minimal coverage with a term policy. These policies come with set duration limits on coverage and you decide whether to renew once the policy expires. Remember that whatever life coverage your employer pays for vanishes if you leave that company.
Standard coverage in this category usually pays 60% to 66% of your compensation if you become disabled and unable to work. As this coverage often comes with a cap, if you are highly compensated, this insurance might also fall short to sustain your standard of living. Estimate your minimum to live on if you become unable to work and, if that number scares you, purchase a supplemental policy.
This pays for assisted living, a nursing home or in-home care late in your life. Even as our lifespans increase, long-term care premiums escalate. If your employer offers any coverage at a relatively inexpensive group rate, lock in some protection. Many advisors will recommend LTCI when you turn age 50 – but getting it while you are young and healthy under an employer plan may still make sense.
Flexible Spending Account
This savings account reduces your taxable income and funds medical co-pays, orthodontist appointments and prescription drug orders, among other expenses. Figure your out-of-pocket medical costs and sign up to set aside that amount, up to $2,750 for 2020, pre-tax in an FSA. Each working spouse can do one. Remember that if you participate in an HDHP, you maintain a related health savings account and can only take advantage of a limited FSA.
Either way, pay for the most of out-of-pocket medical costs with pre-tax dollars.
Dependent Care Flexible Spending Account
If you pay for day care, after-school programs or summer day camps for children under age 13 or for elder care for a dependent parent, DCAs help you offset that cost with pre-tax dollars. Again, a working couple can set aside up to $5,000 from paychecks.
If your company offers this and pays in whole or in part for public transportation passes, ride-sharing or other options, reconsider your routes to work.
Advisors see this wide-ranging employee benefit more and more, from simple mental-health hotlines to complete menus of services.
For instance, if you lack a will, many companies now offer reduced-rate or even complimentary legal services to establish your basic estate planning documents.
If you have questions about your benefits, talk to someone in Human Resources. The point is, make sure you review your benefits. Your future self will thank you.
Be careful of the “lump sum illusion” and talk to your financial advisor
The last few years have not been kind to General Electric – the once invincible, well-known blue-chip company that was one of the most widely held stocks for decades.
Consider the last three years:
- For the year ending 2017, General Electric was the worst-performing stock in the Dow Jones Industrial Average, losing about half of its value.
- For the year ending 2018, GE would have been the worst DJIA performer again, but mid-way through the year, GE got kicked out of the DJIA-club (GE lost about 56% in 2018, by the way).
- A few months later after getting kicked out of the 30-company DJIA, GE’s CEO got the boot.
GE Freezes Pensions
Then on Monday, October 7, 2019, GE announced plans to freeze pension benefits for about 20,000 employees in an attempt to shrink its pension deficit and shore up its balance sheet. Further, GE is “offering a limited time lump-sum payment option to approximately 100,000 eligible former employees who have not started their monthly U.S. GE Pension Plan payments.”
What to Know About Lump Sums
A lot of companies have made changes to their pensions, including plan terminations, plan freezes for employees, and changes to the formula by which pension benefits are calculated. In fact, GE is joined by a growing list of companies making changes to their pensions, including UPS, L.L. Bean, the Boston Red Sox, the Washington Post, Boeing, General Motors, American Airlines, and Bank of America, to name a few. Should you object to a wad of retirement cash all at once? Here are a few things to consider before you opt for that lump sum.
The Lump Sum Illusion
In a recent podcast, Olivia Mitchell, executive director of the Pension Research Council and professor at Wharton talks about what she calls the “lump-sum illusion.” She told her listeners that, “Somebody who gets a lump sum of say, $100,000, might think they are suddenly rich, but that money doesn’t go very far. Based on annuity estimates, a $100,000 payment would provide a monthly income of $560 for a 65-year-old male, and $530 for a female, because women live longer than men.” Mitchell then adds, “But a lump-sum payment could help many older people who are entering retirement with far more debt than they did in the past. Baby boomers are getting into retirement not having paid off their mortgages, and not having paid off their credit cards. A lump sum in such cases could really help older people pay off their debt and move into retirement less exposed to interest rate fluctuations.”
Lump sums might make sense if you expect to die soon without a surviving spouse who will need lifetime income. They might also make sense if you already have another secure source of retirement income or are trained in handling such amounts of money at once. In many other cases, however, accepting a lump sum payout rather than income from a pension may significantly affect your retirement funding unless you take proper steps.
Regarding taxes, for instance, if you receive a lump-sum distribution and were born before January 2, 1936, you may qualify to elect optional methods of figuring, reducing or deferring tax on the distribution, according to the Internal Revenue Service.
Among other tips for you to consider:
- Take your time. You can’t reverse your decision to take the lump sum.
- Lump payouts may not include subsidized benefits that some employers offer as an incentive for early retirement.
And most importantly:
- As you might after any large windfall, plan your decision with your financial advisor.