A Financial Communities Blind Spot: Retirement Risks Couples Face

When it comes to planning for retirement, there are the risks everyone faces, the risks that married / committed couples face and the risks single people face.  Funny thing is, the financial community typically just focuses on the first set of risks – those that everyone faces.   And yet, by completely ignoring the risks that martial status brings to the table – they fail to address a significant set of risks that everyone faces.  An individual’s marital status is a major planning blind spot.  And the consequences can be significant.

I was reviewing a comprehensive retirement preparedness brochure from a major wealth management firm this week, and I must say, it was a fantastic piece.   It covered everything from health and wellness to the finances of retirement planning.  As is typical of such pieces, it and includes a section called the 5 Retirement Risks.   Now, these risks, like much of what traditionally comes out of the financial community are all based on data points.  You know how the actuaries love to crunch numbers and statisticians love to run regression analysis.  The risks they consider are ones that can be brushed with broad strokes. Things like the effects of inflation.  Over the course of what could be a 30-year retirement, inflation (the rate at which the cost of living increases each year) is a big risk.   It means if you spend $80,000 in your first year of retirement, to cover those same costs in future years, it will be $100,000 per year, even growing to $120,000 or more per year, just to maintain your current lifestyle.   That means you need enough saved and generate enough income to keep pace.   It includes withdrawal risk, so the risk of withdrawing too much, and the risk of sequence of returns (experiencing negative returns early in retirement greatly reduces the ability of savings to last as long as they need to), and of course longevity risk.  What happens if you live to 100?  Will you still have enough money.  Yes, these risks affect everyone, they are significant and absolutely need to be considered.  But they ignore personal circumstances.   And it is in the personal circumstances, that significant risks are missed.  In fact, this comprehensive retirement guide missed what I call it the single greatest risk married couples (usually women) face:   That two become one, near to or early in retirement.

When it comes to planning for retirement, single people have an advantage.   They are already planning single.   They are planning for one set of government benefits, if they have a pension, they will get 100% of it for their lifetime.   The planning software is already factoring their higher tax rates for the same level of household income given their inability to pension income split.  Single people can have far more confidence that their savings and income sources that they have built over their lifetime will be sufficient for their lifetime when their retirement plans say they are fully funded.   Not so for married couples.    The typical retirement plan run for married couples is both happy, healthy active to 95.   That plan works for the “we” in the relationship.  It doesn’t work for you, and me as individuals.   You see, a married couple’s retirement plan includes two sets of government benefits.   It includes 100% of a pension plan, it includes the ability to pension income split, lowering the total tax burden for their household.   A married couple’s financial plan, with those assumptions built in, leaves the possibility of a significant decline in income for a survivor.   The loss of one set of government benefits, a 30-50% reduction in the spouse’s pension, and higher taxes.   Those factors all contribute to widows experiencing an average 40% decline in income.

I find it shocking that since baby-boomer women can now expect to outlive their spouses by 10-15 years and experience 40% decline in income on average, that this risk, that two become one near to or early in retirement isn’t talked about.  It isn’t factored into planning.   It is a blind spot.

The good news is, the solution is really quite simple.   Scenario planning.   Work with your advisor to really understand the assumptions of your plan and have a scenario run that shows if something had happened yesterday, and two had become one, what would a survivor’s retirement income look like?  Is it sufficient?   Are their gaps?   What back up options do you have?   Are those options, like selling your home or cottage, palatable?   If they aren’t, what other options might you have?   Life insurance if you are eligible?   Working longer / saving more if you are still working?   The sooner you have the scenario run and know where you stand, the more options you have and the better positioned you are to protect yourself from one of the greatest risks you face.   Your reward:    Enjoying your life together with confidence that each other will be ok.

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