Before The Storm

Before the Storm - Image 460x234
By Sue Peterson, CFA

No one likes to think about the possibility of her husband passing away. Yet statistics tell us most women will end up single at the end of their lives. In fact, women are four times more likely than men to be widowed, and widows typically survive their husbands by 14 years. Taking the time to get your affairs in order while both spouses are alive and well will go a long way toward creating security and confidence for the entire family.

Like starting a new exercise program or making a decision to eat healthier, changing your financial habits can be a challenge. Start with some of the small steps suggested here instead of trying to tackle everything at once. Doing too much at once can be exhausting and make you feel like giving up.

First and foremost, wives need to be fully informed about the family’s financial situation. Finding this uninteresting or unpleasant is not an excuse! Our biannual trips to the dentist or primary care physician are not particularly pleasant, but they are preventive measures that help us be fully informed about our health and give us the opportunity to address any emergent problems in a timely fashion. The same is true of financial awareness and planning.

Adjusting to widowhood is a difficult transition even under the best of circumstances.

I have seen new widows come to my office completely overwhelmed and fearful because they were not involved in their family’s finances, and as a result are not familiar with their joint assets, liabilities and cash flows. Avoid this by communicating early and often with your spouse about your finances. We highly recommend both spouses complete a checklist to ensure both parties know about all bank accounts, pensions, loans, location of the safe deposit box, contacts for key advisors, and other relevant information.

It’s also important to communicate login and passwords for all online accounts, which can save many hours of frustration down the road. Creating and sharing a password list is a good initial “small step” with a huge prospective benefit.

Several key documents must be in place to ensure the unexpected loss of a spouse doesn’t create unintended and unwanted outcomes. These documents include a will or revocable trust, which provides tax planning and creditor protection for assets that pass to the survivor. If there are children of a previous marriage, this also ensures that the wishes of the spouse who died are carried out, increasing the potential for a positive relationship with stepchildren in future years. As a next small step, make an appointment with an estate planning attorney to draft estate documents or update an existing plan if it’s more than five to 10 years old.

For business owners, it is critical to have a succession plan so that this asset, which may provide for future living expenses, continues to be viable. This may include key man insurance so that the business can buy out the deceased’s interest and a shareholder’s agreement and/or buy/sell agreement that outlines the terms of the buyout. Consider establishing a home equity line of credit to use for cash reserves. If the transition of the business takes an extended time, this is an inexpensive way to resolve this potential problem.

New widows may have limited access to funds until probate is open. Having an existing checking account in your own name or one titled as Joint Tenants with Right of Survivorship (JTWROS) can greatly limit this financial stress. The balance should be in line with expected living expenses for one to two months. Add this to your “to-do” list after you have recorded your spouse’s login and password information and updated your estate plan.

New widows may have limited access to funds until probate is open.

Many women worry about replacing their husband’s income were he to pass away prior to retirement. For many, making sure their spouse has sufficient life insurance can eliminate this risk and concern. For example, if a couple spends a husband’s $100,000 after-tax salary every year as part of their lifestyle, and he is 55 years old with an expected retirement age of 65, they might consider obtaining a $1 million term policy on his life ($100,000/year x 10 years) that they hold until he retires. If there are minor children, this amount could be increased as necessary to account for the future cost of college expenses. If you don’t have a life insurance agent already, ask two or three friends who they use and make an appointment with at least one of those individuals within the next three months.

Married couples should also ensure that the beneficiary designations for company retirement plans, annuities, deferred compensation and life insurance name the surviving spouse as the primary beneficiary and not the estate. Particularly with a 401(k) or Individual Retirement Account (IRA), this ensures the surviving spouse will have the opportunity to complete a spousal rollover of those accounts into an IRA of his or her own, which can be used most tax-effectively for retirement. Your spouse will have to update his or her own company plan beneficiary form, but you can do your own through your HR department or directly with the 401(k) provider or IRA custodian.

Adjusting to widowhood is a difficult transition even under the best of circumstances. Tackling each of these recommendations over the next three to six months, one step at a time, can help make sure that financial issues don’t add to the burden of a challenging time.

About The Author

Susan Peterson, CFA, is managing director of Cornerstone Advisors in Bellevue, Washington, one of the top 20 wealth management firms in the country. Peterson brings more than 20 years of financial industry experience to her work with women who find themselves suddenly single as a result of divorce or death of their spouse, as well as retirees and technology wealth.