Making Retirement Plans?

For all their planning, this capable couple hadn't asked a simple question: How will Jean live if Charles dies soon after they retire?

They forgot about spouse protection. They should have done two budgets — one for them as a couple and one for Jean if she had to soldier on alone. (If Jean had been the major earner, they should also have asked how Charles would live if Jean died.) Spouse protection also comes up when you're making decisions about your life insurance and various forms of retirement income.

Here's a quick checklist:

Your retirement budget. Project how much income your spouse would have if you died right after you retired. How long would it last at the level of spending you're aiming for? If your spouse will run out of money before age 100, you're not financially ready to retire (conservative planning, yes, but a reasonable span for those in good health).

Spouse protection may require that you work longer, live on less, or both. Charles liked to live right to the upper edge of their means and never imagined the problems he would leave behind. Jean loved him, but don't ask her now about what she thinks of his financial management.

A company pension. You might have the option of taking it either in a lump sum or as a lifetime monthly income. If you choose the lifetime income, there's another choice: a single-life pension that ends when you die (yielding higher monthly payments) or a joint-and-survivor pension that also covers your spouse (yielding lower payments).

The lump sum, which most retirees take, amounts to a gamble that your investments will do well enough to pay out more over your lifetime than the pension would. It's a reasonable bet for people whose assets are large enough to support them even if the market drops. If you don't have much in other savings, however, your spouse is best protected with a joint-and-survivor pension that's guaranteed for life.

Run, run, run away from the "pension maximization" schemes sold by some financial planners and insurance agents. They urge retiring workers to take the higher single-life pension and use the extra money to buy traditional insurance. If the worker dies, the spouse loses the pension but gets the insurance payout.

Unfortunately, this grand design often doesn't work out. The insurance costs eat into your lifestyle and the payout might not be large enough to support the spouse. And what if inflation eats up your income and you can't afford the insurance premiums? Your spouse is stuck.

If you have a 401(k), it will pass to your spouse automatically. An IRA goes to whomever you've named on the beneficiary form — for total protection, your spouse.

Next: Social Security, life insurance and your papers >>