Three key decisions about retirement benefits can help couples make their money last — or dramatically increase the chances the survivor will end up broke.
Widowed women are twice as likely as their male counterparts to live in poverty during retirement, according to a March study by the National Institute on Retirement Security. But anyone who outlives a mate can be vulnerable to a big drop in income and lifestyle because of shortsighted decisions about claiming benefits.
These are the decisions that couples need to get right:
- How to take retirement benefits
You may be offered a choice between taking a lump-sum distribution from your retirement plan or accepting a series of monthly checks. Theoretically it’s possible to earn more over time by investing the lump sum, but a bad market or a too-rapid withdrawal rate can undermine your returns. By contrast, the monthly checks could be guaranteed income that can last for both your lifetimes.
Couples should try to make sure that at least their basic expenses in retirement are covered by sources of income that are guaranteed, which can include Social Security, pension payouts and annuities.
- Which payout option to choose
If you do opt for monthly checks from a pension fund, you need to decide how big your checks will be and how long they will last.
Let’s say your pension plan would give you $3,000 a month if you opted for the single-life payout — but that payment ends when you die. A joint-and-survivor payout that drops by half after your death might start at $2,873, assuming you and your spouse are roughly the same age.
If you want the checks to stay level after you die, your initial monthly payments might shrink to $2,754. Delia Fernandez, a certified financial planner in Los Alamitos, California, suggests clients choose this option unless there’s a compelling reason to reduce it, such as a spouse who “has a whole bunch of money or a pension of her own.”
- When to claim social security
The higher earner typically should delay starting Social Security as long as possible, because that’s the benefit the survivor will get. (The survivor’s benefit is the larger of the two the couple receives.)
Those who wait beyond full retirement age can increase their benefits by an additional 8 percent a year until their checks max out at age 70. Conversely, an early start locks in a permanently reduced check.
Be wary of insurance schemes that suggest you opt for a single-life payout from a pension and use a part of that larger check to buy life insurance instead. This so-called pension maximization may be a plan only an insurance agent could love, so run it past a fee-only financial planner — one who doesn’t earn commissions on insurance sales — for an objective second opinion before you proceed.