Financial Planning and the Death of a Spouse

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Graveyard1There are critical times in the course of life when financial independence is at risk of destruction. A lifetime of planning, saving, and investing can go up in smoke in a few short years without an adequate plan to protect the most vulnerable member of a marriage (or any relationship, for that matter) after the death of a spouse or loved one. The trauma and grief after a loved one dies is acute. Deep pain and emptiness creates risks for the surviving spouse. Well intentioned, and lonely, people will try to connect with the bereaved. A couple committed to a lifetime of financial discipline will acquire a massive nest egg of retirement wealth. The surviving spouse is a prime target, a highly desired, person for this reason. Even people with honorable intentions can wreck havoc on the surviving spouse’s finances.

One of the saddest moments in the Wealthy Accountant’s office is when a client dies. An elderly person dying is painful, but understandable. The deepest wounds come from clients who die at a young age. Today we will focus on people in long-term relationships, living a frugal lifestyle, and have attained financial independence. I will introduce you to a client who lost his wife at a relatively young age. His grief was only the beginning of his pain. Then I will offer some ideas to prevent the same damage happening to you or your loved ones when you face the same situation.




Who Goes First

As the years add up I have started to wonder if Mrs. Accountant will leave this world before me. I always say, “Dying is the easy part; we all do it right the first time. It’s the living that is hard.” I refuse to worry about it because there is nothing I can do about the future. What I can do is plan. With an adequate plan I can manage if Mrs. Accountant dies before me and by working with Mrs. Accountant now I can help her build tools to survive the trauma of my death before hers.

51-ok2DRpDL._SX331_BO1,204,203,200_Survivors need my attention. There is no 100% guaranteed way to protect loved ones after you are gone. There are steps you can take to increase the chances your loved ones will be okay financially after you die. The best way to start this discussion is with an example from a client. Let me introduce you to Ben and Lou (not their real names).

Ben and Lou walked into my office decades ago. Lou managed the money in the household. Ben was a laid back husband living life one day at a time. Back in the 1960s Lou worked for the Zwicker knitting mills in town. Back then they had a program where you could take money from your paycheck and buy U.S. savings bonds. Lou did just that. Every week she took a modest amount from her paycheck and bought savings bonds. Ben and Lou also added to their retirement savings over the years in addition to the bonds.

Lou never invested optimally. She proved to me saving is more important than hitting a home run in your portfolio. She never owned a mutual fund in her life. Her money was in savings bonds, CDs, and fixed annuities. She did have the advantage of the high interest rate environment of the 1970s. Still, she managed to pay off the mortgage while building over $400,000 in liquid funds. Ben and Lou also had pension plans provided by their employers. The knitting mills went bust in the 80s, leaving Lou with a significantly reduced pension.

Ben and Lou stick out in my mind because Lou had a unique way of presenting her tax information to me. It was easy for me to understand and helped facilitate a fast and accurate tax preparation. Every year I looked forward to meeting with Ben and Lou.

Graveyard3They retired at a relatively young age, but not exceptionally so. By age 60 Ben and Lou were living the good life. It did not take long for disaster to strike. A few years into their 60s the news came Lou had fallen and was taken to the hospital. She had a stroke and did not survive. Ben was distraught and lost. He had no idea what to do with his life. He was alone. Money issues were now his to manage. His entire life he avoided dealing with money; Lou took care of that. I worked with Ben and his financial advisor to help him make good decisions on his finances. Then the second disaster struck.

Loneliness causes smart people to do really dumb things. Ben was alone in this world and lost without Lou when a widow befriended him. She lacked Lou’s skills with money. Soon a relationship started and the new woman was helping herself to Ben’s money. Let me make this clear, she was not stealing Ben’s money. But she encouraged Ben to ramp up his spending.

Ben married his new sweetie shortly thereafter.  Now in control, the new wife really turned on the spending. The financial advisor contacted me. He was concerned about how fast Ben and his new wife were burning though their cash. I was shocked to learn the new wife ramped Ben’s spending to $180,000 per year. Yikes! Ben was too distraught to listen. He trusted his new wife would take care of things like Lou had. It was not to be. In just over two years the money was all gone and they went back to living on Social Security and a small pension Ben received. Even the personal residence was sold to cover spending. They live in a small apartment now.




Protecting Loved Ones

It breaks my heart to tell this story. Ben and Lou are awesome people; my opinion of the new wife is less flattering. She refused to listen to the financial advisor or me. She eventually convinced Ben to change accountants because she did not like my advice and I raised my prep fee $5 one year to a whopping $110. Let me repeat that: She was spending $180,000 a year like a crazy woman and felt $5 was too much extra to pay for sound financial advice.

Keith’s Rule # 16: Only wealthy people pay for sound financial advice.

Lou was great at saving and keeping the household spending reasonable. She never invested; she only saved. Lou never talked about money with Ben. She just took care of it and everyone was happy. Money was not an issue. Until Lou died.

It did not have to be this way. Steps could, and should, have been taken to protect Ben from himself and from a future partner with limited money skills. Here are some of my recommendations to clients:

  • Talk Talking is the most important part of a relationship. I know some people have no interest in discussing money, investing, or retirement planning. It is still important for all parties involved to know where the money is, how to access it, and the best way to preserve the lifetime of saving/investing. A lack of interest in money does not mean a lack of interest in what life will be like for the spouse who lives longest. Mrs. Accountant and I talk about money on a regular basis even though she has about as much interest in it as Ben does. Regardless, I have armed Mrs. Accountant with tools to protect her in the vulnerable years after I die if I should die first.
  • Annuities I am not a fan of this strategy, but in certain instances have recommended it because it was the only way I could see to protect my client. Annuities lock you into a low return with lots of fees. However, when both spouses are great at saving and live frugally, but have no interest in money, it might be time for an annuity. Here is the trick. Annuities are accessible in full (minus a surrender charge) at any time (in most cases) prior to annuitization. Annuitizing an annuity can make a bad investment worse. What is also does is protect you from a snatch and grab. Once you annuitize, the money belongs to the insurance company. You have a contract where the insurance company will pay you an income stream for a period of time, say monthly for a number of years or, more commonly, the remainder of your life (or that of your spouse in a second to die policy). You have no right to the original money so a new wife can’t show up and blow all the money in two years.
  • Grandpa’s Rule My grandfather was tight with his money. He deposited most of his money in the bank with only a small amount of his portfolio in stock mutual funds. He managed to sock away well into the seven figures. And he was a farmer his whole life! My grandparents had a lot of great rules/advice on money. You had to listen close or you would miss them. He never came out and said ‘This is how you handle money.” Instead, he would make a comment on a certain situation which revealed his attitudes toward money. My favorite advice he gave was: Never take off the stack. If you blinked you missed it. What he was saying was you never touch the corpus. Ever! You can spend interest and dividends, but the original investment and capital gains are sacred cows never to be touched. It is sound advice. Both people in a marriage need to share this idea with each other on a regular basis. Then, when the day comes and somebody tries to convince the survivor to spend the original investment the rolling pin comes out.
  • Warren Buffett’s Rule Warren Buffett’s advice to his heirs, including his wife, is put 90% of the money in index funds and the remaining 10% in short-term government bonds. The money in bonds is for daily expenses.
  • Keith’s Rule My advice to family, including my wife, is nearly the same as Buffett’s. My advice to family is to keep 3-5 years in short-term investments (governments bonds, laddered insured CDs, money market accounts, or other insured bank deposits) and investing the remainder in index funds with dividends deposited to the short-term account. Reinvest capital gains.
  • Know You can’t Protect Your Family When You are Gone The hardest part is knowing you can’t really protect your family when you are gone. If they are intent on destroying their wealth there is nothing you can do to prevent it. Even annuitized annuities can be destroyed by loans taken out again the income stream. You can plan accordingly and talk. After that there is no need to worry. You did all you could.
  • Children There are a few additional protections available when it comes to the kids. First, you can smack them around. (Did I say that?) Seriously, when it comes to the kids you can set up a trust where they do not get the money in a lump sum. My girls will not see money from dad until they are 35 years old. There are no incentives for my girls to see dad step into the grave early. The best part is they get 1/15th each year. Yes, my kiddos get their inheritance over fifteen years starting at age 35. If they haven’t figured it out by age 50 they never will and it is not my problem.

Talking about money with a loved one is necessary. Talking about death is also important. The odds favor one spouse dying before the other unless a plane crash or auto accident takes both out at once. Someone in the relationship will live without their soul mate at some point. Gold diggers are everywhere waiting for an opportunity to get a free ride. Discuss the issues now.

GraveyardaNo one knows the future. I don’t know if Mrs. Accountant or I will die first. We talk about it. Not every day, of course. We are not morbid. But we do discuss it. I want Mrs. Accountant to know that if I die I want her to be happy. She has my blessing to find love again. I hope she does if I die first. I want her to find another man who will love her as much as I do. I also warn her about men only interested in the money. Mrs. Accountant is a smart woman. She will be fine if I die first. I don’t want her to ever feel the pain of loss, but it is part of the deal in a life-long relationship.

You need to engage in the same planning. Legal instruments like trusts can help protect family members. Planning together and talking openly and honestly also helps. After that you can rest assured you did all you could. Now go out and enjoy your relationship. It does not last forever.




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Keith Schroeder

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