Retirement and Widowhood
A recent article from a Forbes online source raised the issue of retirement, inheritance tax and reduced inheritance tax and finally widowhood. (William Baldwin, “Retirement and Widowhood“) While we frequently plan for our estates considering what we leave to our spouses and children it is probably a fact that we rarely consider the long life ahead for many spouses as widows or widowers. While our spouse could remarry, it is also likely she or he could decide to remain single. Is she (or he) prepared to face the financial and other challenges ahead alone?
This thought came to mind recently when a professor teaching a course in financial planning I was attending through a webinar commented that he strongly encouraged his wife to go back for additional education, his motive being that he wanted to assure she had a profession to fall back on for financial support if he died and she needed to manage the finances alone.
Some of the considerations raised in the Forbes article included when to take Social Security benefits and whether to take a lump sum on retirement or what is referred to as a joint and survivor annuity. These are both subjects on which I have commented quite a bit over the years.
The general impression these days is to delay taking Social Security if it does not cause too much of a hardship. As William Baldwin pointed out you could take Social Security as early as age 62 but could boost your benefit 76% if you wait until age 70. The difference between taking it at what is now full retirement age (66) and age 70 is 32%, a fairly generous secure rate of return. This may be relevant to your spouse’s financial survival if your spouse earns less than you. If your Social Security is higher on death than your spouse’s, she (or he) may claim on your higher benefit.
Regarding lump sum corporate pension vs. joint and survivor annuity, the question is do you take the higher figure on retirement or a somewhat lower one that continues through your life and the life of your surviving spouse. Consider this. You could choose the higher sum up front and die very soon after. There are actual cases. This would leave your spouse without an additional source of income for the rest of her or his life. There is an option also to have your spouse receive a percentage portion but, considering the cost of living today, a 100% continuation could be very helpful.
Years ago, when planning estates, it would have generally been assumed that a surviving spouse might not live long after her husband or his wife died. If both died in their 60’s or early 70’s there would not be an extended period when the survivor would need to fend for herself. Today it is not out of the question for one spouse to die at age 60 and the other go on to live into her 90’s or beyond.
The problem could be intensified by later marriages with each spouse having children by a prior marriage. There were planning tools that dealt with this. Qtip trusts, for instance, could provide income to a spouse while allowing the underlying funds to continue on to be inherited by the children or grandchildren at a later date. Federal estate tax planning could divide estates into what were commonly called “A” and “B” trusts with the second trust being referred to as a credit shelter trust or family trust. One factor that has seriously complicated estate trust planning is the top heavy incidence of IRA, 401(k), 403(b) and similar retirement and pension accounts in the overall portfolios of couples in higher tax brackets. Retirement funds such as IRA’s need a “designated beneficiary” and do not lend themselves easily to trusts without considering tax consequences. It can be done but with extreme care.
Finally, without knowing how long you or your spouse will live it can be difficult to know how to plan. Do you plan so your children will inherit sooner or are you concerned your spouse who is your widow or widower will run out of money? You make decisions that of necessity have to be based on inadequate information about the future which in some ways has probably always been the case.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.