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If you’ve gotten the opportunity to read our prior post, you may have started the process of financial organization for your surviving spouse. Whether imminent or not, preparing for the inevitability of your passing will give both of you the peace of mind you strive for. If leaving a legacy is important to you, planning ahead is necessary.
Working With Your Spouse on a New Plan
The memorial and burial process of a loved one is sure to be an emotional event.
But there is also a financial cost to this. While the grieving process may continue, covering the costs associated with burying a loved one will also come due. If you haven’t yet created a budget with your spouse, now is a great time to do so.
But as life will begin to normalize for the surviving spouse, the finances are almost certain to change. There are 6 items you should plan for ahead of time to make sure your surviving spouse knows what to expect:
- Emergency Savings Account Plan
- Understanding Social Security Spousal Benefits
- Pension/Annuity Survivor Benefits
- Retirement Account Transfers
- Housing Considerations
- Discretionary Spending Changes
Tax Filing Status Changes should also be considered, and we did another post on that as well.
Emergency Savings Account
It is nearly universally recommended to have some level of an emergency fund reserve account. The simple reason is due to life’s uncertainties. But at a spouse’s passing, it’s very likely that you’ll notice numerous expenses that can likely cause this account to be tapped into.
Assuming that is the case, working with your spouse to budget both the expected expenses and ones to come is a wise move. But is your spouse prepared once the final expenses have been paid to carry on without you?
You should be working to ensure the following:
- Your spouse has access to the funds at a bank of convenience for him/her.
- He/she has 6-12 months accounted for in this account.
- This account is not subject to unnecessary risk.
Positive cash flow is a prerequisite for a sound financial plan. The unexpected expenses will still persist for your spouse, so a healthy emergency fund should be the first course of action you address.
Understanding Social Security Survivor Benefits
Depending on you and your spouse’s work history, your spouse may be eligible to collect your Social Security benefit. If the surviving spouse is already receiving his/her Social Security benefits, he/she can switch to the survivor benefit assuming that is a higher amount.
The qualifications and application process are as follows:
In the event the surviving spouse’s Social Security Benefit is higher than the deceased, there is no need to switch the current benefit he/she is receiving.
Pension and Annuity Survivor Benefits
Similar to Social Security Benefits, a surviving spouse may be eligible to collect a pension or annuity benefit as well. There is more nuance to this, however, as not every spouse may have a lifetime pension or annuity. Furthermore, there are numerous types of annuities that are on the market, so planning for this ahead of time may be helpful.
There could be some benefits available to your surviving spouse depending on your pension election when you first began to receive benefits. Common ones include:
- 100% Joint & Survivor
- 75% Joint & Survivor
- 50% Joint & Survivor
If any of these options were chosen, your surviving spouse should be able to continue the benefits as outlined. These options are generally an irrevocable decision at the time you’ve chosen your benefit, so be sure to understand the impact your decision has (or had), at the time of your election.
If you’ve chosen a single life annuity with no spousal option or rider, understand there is unlikely to be a benefit for your surviving spouse. There could also be options known as “period-certain options.” These can pay out to a survivor, but only for a designated period of time.
For example, Stanley Hudson (working spouse) chooses a 10 Year Period Certain annuity of $2,000/month. If Stanley passes away 3 years past the election date, his surviving spouse, Cynthia should be eligible to receive $2,000/month for the next 7 years. After the Period Certain time has expired, this benefit will cease.
Planning for this type of benefit should be clearly communicated, as that could set up a lifestyle that could drastically change upon the termination of the Period Certain benefits.
Retirement Account Transfers
Retirement Account Transfers can vary depending on the type of account you have. Making sure it passes along to your spouse efficiently starts with making sure your spouse is named as beneficiary. Here is a helpful graphic breaking down how this works:
Housing Considerations
While much of the discussion is a financial one that is based on quantitative figures, this can be an emotional tie. There’s no hiding it, a home has sentimental value. A 401(k) withdrawal does not have the same emotional meaning as when you buy or sell a home. Therefore, emotional ties must be considered.
Once this consideration has been accounted for, there are financial matters that you must take into consideration. There are questions that need to be answered:
- Can I afford the mortgage? (if applicable)
- Can I afford the insurance and property tax?
- Can I afford the maintenance costs?
- Should I consider moving to a lower cost area?
- Should I consider moving closer to family?
These questions, in conjunction with the emotional considerations, can allow you flexibility to choose a new place to live. Again, the importance of budgeting cannot be understated because this is a life-changing decision a surviving spouse will need to make.
One additional consideration that needs to be accounted for is the capital gain on the sale of the home. The IRS allows for an up to $500,000 capital gains exclusion if the home was used as a primary residence for 2 out of the last 5 years. But after 2 years of the spouse’s passing, that exclusion drops to $250,000.
Discretionary & Essential Expense Changes
When planning a budget for a surviving spouse, there are expenses that are shared among spouses, and some that are independent.
Common expenses that are unlikely to change:
- Mortgage/Rent
- Property Tax
- Home Maintenance & Improvements
- Insurance
- Utilities
- Auto Payments & Registrations
Keeping these steady in a proposed budget is a high likelihood. However, you may notice a significant change in the following:
- Groceries
- Phone bill
- Dining Out
- Entertainment
- Clothing
- Travel
Again, each situation will vary, but in our experience, we’ve seen hobbies change for widows & widowers. As a result, there is likely to be a budgetary change. Allowing for some cushion in monthly cash flow can allow this to be a natural transition as opposed to a forced one.
What You Can Do Now
As we know, death is an inevitability facing us all. But the challenges financially for a spouse to carry on can put additional stress on a widow(er), especially one who is easily overwhelmed by financial matters. Addressing each of these ahead of time and making sure you have a plan will grant everyone the peace of mind you deserve.
If you haven’t made a plan yet and need help doing so, my team and I focus on these key areas. More importantly, we’re focused on building a relationship with couples to make sure they do not have to do this alone. If this is of interest to you, be sure to book a call using the link below.