Few life events are as challenging as the death of a spouse. The grief, sorrow and emotional fallout can be devastating, and the surviving spouse may find themselves facing a future that looks very different than the one they planned for.
This can be especially true when it comes to your financial situation. When the time comes to adjust your retirement finances following the death of a spouse, it’s important to thoroughly examine all of your options and plan accordingly.
In many cases, the surviving spouse may find that their income and benefits have changed due to their partner’s passing in ways they may not have prepared for.
“Ideally, both spouses should be involved in making a financial plan as early as possible,” says Colin Wheeler, a partner and Certified Financial Planner™ (CFP) at Cerity Partners. “But it does often happen that the spouse who passed away was also the one who handled all the finances. It can be extremely overwhelming for the surviving spouse to suddenly have to put together all the different pieces of their financial picture.”
For this reason, Wheeler emphasizes the importance of working with a certified financial planner to help organize your finances and make a plan for the future. For example, a surviving spouse may not be aware of every investment their partner might have made. But a CFP can pull tax returns and look for any dividends being paid out, which then helps them track down the deceased spouse’s investment accounts.
“Finding all this information can sometimes be a scavenger hunt,” Wheeler says. “So having a certified financial planner or other fiduciary they can trust can be very helpful when it comes to making sense of cash flow streams and building a new financial plan for the future.”
Whether the surviving spouse is working out their finances on their own or with a CFP, it can help make the task more manageable to break down the process into three steps, which we’ll examine in detail below.
Step One: Understand your cash flow
According to Wheeler, the first step is to make sure you thoroughly understand the cash flow available to you. What money is coming in and what expenses are going out on a month-to-month or year-to-year basis? What sources of income are fixed, like Social Security and pensions? What portfolio distributions are available from 401ks, IRAs and other investments?
This can be a complicated process to manage, especially if the deceased spouse handled most of the finances for the household, so it might help to focus on the following four tasks one at a time.
Gather all the paperwork
One of the first things you’ll want to do is find and organize as many financial records as possible, including bank account and credit card statements, stock portfolios, and outstanding mortgages and loans. Once you get a sense of what your total shared assets are, you can start estimating what your month-to-month income and expenses will look like going forward.
You’ll also want to locate any documents that might be necessary to apply for certain benefits, such as your spouse’s birth certificate, death certificate, life insurance policy and your marriage certificate.
Next, you’ll want to see which of your spouse’s existing benefits you’re eligible for and how they affect your income. It’s good to be proactive about these benefits as soon as possible, as many of them don’t go into effect automatically.
Social Security survivor benefits
When both spouses were receiving monthly Social Security benefits but the deceased spouse’s benefit rate was higher, the surviving spouse should immediately be eligible to receive the higher monthly amount in place of their own. This means that claiming spousal Social Security benefits may result in you receiving a higher monthly payment amount. However, be prepared for there to still be an overall decrease in household income since the Social Security Administration (SSA) will no longer be paying you your former monthly benefits.
A surviving spouse who doesn’t yet qualify for monthly Social Security benefits may still qualify for some form of survivor benefits if they are 60 or older at the time of their spouse’s death, or 50 and older with a disability. Remarriage should not affect eligibility for survivor benefits.
In addition, a one-time lump-sum payment of $255 may be paid to the spouse of the deceased if they were living with the deceased. If the spouse was living apart but receiving certain Social Security benefits on the deceased’s record, they may also be eligible for this payment.
You can report a spouse’s death and apply for SSA survivor benefits by calling the Social Security Administration at 1-800-772-1213 (TTY 1-800-325-0778) Monday through Friday between 8 am and 7 pm local time, or by contacting your local Social Security office. Social Security survivor benefits cannot be applied for online.
Pension benefits
Unlike Social Security, pension benefits for survivors vary depending on the level of survivorship elected when the pension began. This means that your income level may slightly or drastically change following the death of the pensioner.
Most standard pensions pay out a default 50% to survivors, but if the pensioner elected a higher or lower percentage, the survivor’s benefits would be locked into that. Much like insurance plans, pension survivorship rates are usually difficult or impossible to change after the initial selection is made.
If you aren’t sure about the details of your spouse’s pension plan, you or your certified financial planner should contact the pension manager directly.
Portfolios and investments
The death of a spouse can impact your existing investments and perhaps offer the opportunity to make new ones. For example, if your spouse had a 401(k), you would automatically inherit some or all of it unless your spouse specified otherwise in their plan.
If your overall income goes up or down due to the death of a spouse, you may want to adjust the amount you take out of your portfolio each month. You may also inherit some of your spouse’s IRA or other assets, which can lead to a reconfiguration of your own investments. Similarly, if you choose to liquidate some of your inherited assets – for example, a car or second home – you may want to invest the money in a portfolio that can help sustain your retirement expenses.
Step Two: Make a plan for the future
Once you have a clear understanding of your cash flow, you can start making projections for your financial future. Just remember, everyone’s retirement plan will look different depending on their needs, priorities and personal situation.
When estimating a budget for your future spending, it’s better to err on the conservative side. This way any disruptions down the road like decreased income or an unforeseen emergency expense can be afforded more easily. You want to avoid ending up in a situation where you’ve spent too much of your savings too soon.
Prioritize your expenses
When building a financial plan, it’s important to attend to your most essential needs first. Housing costs, monthly bills, medications and other recurring expenses will need to be covered on a regular basis.
After these priorities are accounted for, your financial plan will depend largely on your lifestyle. For example, someone who wants to travel more might be taking more money out of their retirement funds on a monthly basis than someone who prioritizes leaving a larger inheritance to their children or grandchildren.
“The classic question is, ‘How much money do I need for retirement?’” Wheeler says. “And my answer is, ‘it depends on how much you want to spend.’”
Factor in longevity
Age and general health are key factors in accurately estimating your future financial needs. If you’re making a new financial plan at age 70, your budget and expenses will likely look very different than if you’re making a new financial plan at age 90.
A longer retirement requires more savings, and can also mean new medical and assisted living costs may develop down the road. The projected length of your retirement will have an impact on what kinds of funds you invest in and what percentage of the principal you’ll want to take out each year.
Update your estate planning
It’s advisable to revisit your estate planning following the death of a spouse, especially if it’s been a decade or more since you’ve updated it. While it can be difficult to imagine the world going on without you, making sure you have the right arrangements in place can make things easier for your surviving family members.
Start by taking note of any changes in your assets, liabilities or preferred beneficiaries. Make sure you’ve completed any desired modifications to your will and appointed an executor. From there, you can decide whether to hire an attorney to help you finalize the paperwork or use an online service to do it yourself.
Step Three: Stress test your plan
Once you’ve made a financial plan that fits your needs, it’s time to evaluate how effective and resilient your plan will be over time. Remember that a plan is not a guarantee, so you’ll want to try to anticipate as many complications or weak spots as you can to have as smooth an outcome as possible.
Consider the variables
Retirement plans aren’t made in a vacuum. Changes in your income, market fluctuations, inflation and unforeseen emergencies can all complicate your financial outlook. You’ll want to examine some hypothetical scenarios that let you see how they’ll affect your financial forecast.
How badly would a market crash damage your investments? What liquid assets are available to you if your investments take a hit? If you were to move to assisted living earlier than anticipated, how would this affect your cash flow?
The more “what-ifs” you consider, the more you can incorporate these insights to build a solid and durable financial plan.
Be prepared to adapt
Flexibility is important to any retirement plan, as your financial needs may change over time. If significant changes occur to your cash flow, health, or retirement goals, it might make sense to revisit and revise your financial planning.
“People’s lives are dynamic, so it’s important to not carve your retirement plans in stone,” says Seth Newby, a Certified Financial Planner at Cerity Partners. “People’s wishes and requirements change over time, so you’ll want to be able to update your financial plan to reflect your current situation.”
Stress testing your plan to account for these changes can help you understand which aspects can be adapted to new situations and which aspects are relatively inflexible. It can be helpful to consult with experts about new changes that may arise over time, such as changes in tax laws or market conditions.
Run simulations of your plan
Finally, you’ll want to run some simulations to see how your retirement plan might play out over time. A certified financial planner can be especially helpful when it comes to evaluating simulations, but you can also do it yourself using retirement simulation software programs like IncomeWize and Empower.
Once you’ve optimized your financial plan to account for the simulated scenarios, you should have peace of mind knowing that you’ve constructed a realistic and resilient budget for the rest of your retirement.
Building a new future
The death of a spouse is a life-changing event. Adjusting to this new reality brings a number of emotional and practical challenges that can seem overwhelming. Taking a proactive approach to modifying your finances soon after a spouse’s passing can help ensure that you’ll still have the resources and security you need going forward. The future may be different than you imagined, but with the right financial planning, it can still be a fulfilling one.
