Your Retirement Plan Has to Work Twice

Most retirement plans are built for two people and tested against one lifetime. The math gets checked against two dates: when they plan to stop working, and how long they expect to live. Then one spouse dies, usually years before the other. A plan that looked fine for two now has to work for one.

The one left behind is the person who finds out whether the plan was any good.

How long one of you is likely to live

How long people live usually gets quoted as a single number. For a married couple, that one number hides the thing that matters most. Social Security's own tables put it this way:

• A 65-year-old man has a 50% chance of living to 84
• A 65-year-old woman has a 50% chance of living to 87

Those are midpoints, so half of each group lives longer than the number shown. Put two people in one household. The odds that at least one of them reaches 90 are better than even.

Women tend to live longer, and wives are often a few years younger than their husbands. Both facts point the same way. In most married couples there will be a stretch of years lived alone. That stretch is usually longer than the plan expects.

What changes for the one left behind

Three things move at once, and only the first is obvious.

Income falls. Social Security pays a surviving husband or wife the larger of the two benefits. The smaller check stops. A household that had been getting two checks keeps only one. If the two benefits were close in size, that is near a 50% cut.

Costs do not fall by anything like as much. The mortgage or the rent stays exactly where it was. So do property taxes, home insurance, power and water, car costs and most of the upkeep. Food costs drop and one Medicare premium goes away, but the rest of the household bills carry on as before.

Taxes usually go up. A surviving spouse can file a joint tax return only for the year of the death. After that the return is filed as single. Single filers hit the higher tax rates on less income. The standard deduction, the part of income never taxed at all, is smaller for them too. More of the Social Security check can be taxed as well, because the cutoff for single filers is lower. The money coming out of the retirement accounts often stays the same, since the survivor usually keeps those accounts.

Four questions worth answering while you are both here

Each of these has an answer you could find this month.

1. Which Social Security benefit survives, and what does the household lose? Look up both amounts. The smaller one is the one that stops.
2. Does any pension or annuity income continue, and at what rate? Pension survivor options are chosen once, at retirement, and usually cannot be changed afterward. Some pay a survivor 50% or 75%. Some pay nothing at all.
3. Would life insurance cover the gap? Replacing income for a surviving spouse is one of the clearest jobs life insurance still does after the working years are over, and working out the amount is simple math.
4. Does the surviving spouse know where everything is? The accounts, the logins, the people to call. A survivor who cannot find the money has the same problem as a survivor who does not have it, and I have written about that conversation separately.

Income built to cover both lives

Lifetime income, which usually means an annuity, can be set up to cover two people rather than one. It can keep paying until the second person dies, not the first. The starting payment is lower than it would be for one person alone. The insurance company is covering a longer run of years.

That smaller payment is the price of the second lifetime. For a married couple it is very often the version that matters. Ask for it by name rather than assuming it comes as standard.

A plan that suits a couple but fails a survivor only works for the first half of retirement. The half that follows is usually the longer one for whoever is left. The plan is also far easier to fix now, while both of you can still make the choices together.

If you know a couple who has never had this talk, this is worth passing along.

If you would like to see how your own plan holds up for the survivor, I am happy to walk through it with you.