itsHERmoney.com

What happens to my retirement when my spouse dies?

Written on September 19, 2011 at 11:20 pm, by admin

When you’re building the financial means to fund your retirement years, one of the areas that people often skip over is how this picture might change if either you or your spouse should die. This is an especially an important consideration if you’re a women, as women on average still outlive our men.

Rather than retirement planning with blinders on, it’s important to face some facts. You have to plan for the possibility that your spouse will not be there for your entire retirement.

How to plan for the inevitable:

Step 1: How much are your ‘basic’ retirement costs?

What are the basic costs you estimate to have in retirement? For example, assume you are in retirement today. What are your fixed monthly/yearly costs (i.e., your mortgage, utilities, food, taxes, insurance, hygiene/personal)? Which of these costs do you expect to continue to have in retirement? For example, your basic costs today are around $4,500 a month. At retirement you expected these costs to drop to around $2,300 (today’s value). Assuming your mortgage is paid, you have only one car and the kids have finally moved out.

Step 2: How much would these basic costs change if there is only one of you?

If you are going through retirement on your own, most likely the food bill will drop a quarter to a half, the utilities may go down a bit, personal/hygiene is reduced, etc. However, the major costs like the tax and insurance owed on the home and car will not be reduced by much. So again, let’s assume these costs drop to $2,000 a month. Will you still have enough after tax income after the loss of a spouse to cover the expenses?

Step 3: What income will be coming in between you and your spouse in retirement?

For each spouse calculate how much is coming in in CPP, OAS and company pension plan (before income splitting) on your desire retirement date. Let’s assume both people in the couple are 65.

For example,

Spouse A -Rick Spouse B – Barb

CPP 800 300

OAS 500 500

Company pension $2,700 400

Total $ 4,000 $1,200

The combined total in today’s dollars comes to $5,200. That would be more than enough to cover your estimated after tax costs of $2,300.00 (again, in today’s dollars). Now you can start planning how you will fund your lifestyle costs or the ‘fun’ things you want to be doing- golfing, travel, hobbies.

Step 4: What retirement income will be coming in if say Spouse A dies when he is 67?

Rick, Spouse A is in his second marriage. In the first marriage’s divorce settle, the wife got the RRSPs and he kept his full pension. However, he changed his pension option from 60% payout to his spouse when he passes to zero payout so as to take the maximum pension available. Barb, Spouse B, started work late in life to raise kids from her first marriage. Her $400 pension was half of her ex- husband’s pension plan. She never qualified for a pension through any of her own employment means. She was out of the work force for some time and has not upgraded her knowledge or skills. She has only been able to work at lower pay jobs and has a smaller CPP payout and no company pensions of her own.

Barb may be entitled to some survivor benefits. However, the most amount payable of the CPP Survivor benefit and the CPP retirement pension is the maximum retirement pension of $940 a month ($943).

Since spouse B is over the age of 65 and is receiving her own OAS payment she doesn’t qualify for the Allowance for Survivors (which requires that she must be low income between the ages of 60-64).

If Rick passes on Barb will have:

CPP $940 (maximum payable)

OAS $500

Company pension $400

Total $1,840 before tax

Barb`s gross income (before tax) is now $1,840 and her net (after tax) basic expenses are $2,000 a month, in today’s dollars. She will not be able to fully cover her basic no frills retirement lifestyle. Let alone hobbies, travel, entertaining or any kind of fun that costs money. The one time maximum $2,500 Canadian Plan death benefit payable to the estate helps with the funeral costs but not so much the day to day living costs.

Hopefully, Barb has the savings to cover her monthly shortfall plus fund any other retirement activities and dreams. If not, she will have to downsize her lifestyle. That may mean selling the home and moving into a condo. There by reducing her overhead costs plus creating an investment portfolio to draw some income from. Barb may not want to leave the family home. She could look into a reverse mortgage but they can be costly. What other options would have been available to her had she planned?

Step 5: Plan in advance to ensure you don’t find yourself short of money in retirement

Best case scenario, Barb has been seeing her financial advisor annually to review her goals and action plan, especially after her first divorce. She would have had a pretty good idea then that retirement was not looking too good. And a savings plan of action should have started then. The longer you have to save, the more compound interest works for you – even if it is only $25 a month. That is better than nothing.

In addition, she could have looked for employment that offered a good pension plan or any plan. Or even consider upgrading her skills and education to increase her income, pension possibilities and a larger CPP payout. The more time you have, the more options are available!

One option couples often consider is an insurance policy to fund the shortfall in income that would occur when the person with the larger pension income dies first. Your financial advisor can calculate what amount of a policy you require to make up for the monthly shortfall for the estimated life expectancy of the surviving spouse.

As a benefit- no major life changes have to immediately take place. When the spouse dies, the life insurance company cuts a cheque payable to the beneficiary (hopefully the surviving spouse), tax free and avoids probate. The surviving spouse can then `conservatively` invest the proceeds to produce income that should supplement any shortfall in the overall expenses. For the time being, the surviving spouse can remain in the family home (if left to them in the Will) and maintain the existing lifestyle.

Photo credit : Hudson