SUDDENLY ALONE: A FINANCIAL CASE STUDY OF WIDOWHOOD
By MARY LYNNE DAHL, CFP®
October 28, 2019
(SitNews) Ketchikan, Alaska - For married couples, becoming single again, whether from divorce or being widowed, is traumatic and creates many questions about money. This article will look at widowhood first, then divorce in a separate article and will examine the effects on your money from each event. The articles will be formatted as case studies, using real life people, under false names, to illustrate the issues, problems and solutions recommended in each case.
The first case study is a 64 year old woman we will call Elizabeth. Her 71 year old husband has died suddenly from a heart attack, leaving her to manage their finances on her own. She has not been very involved with their money, having spent many years raising their children, now grown and independent (thankfully). She has not worked outside the home since the birth of their third child 29 years ago. She has several pressing issues that she needs to deal with and is very unsure of herself to make the right decisions on each issue. She sought help from a certified financial planner in her town. Their discussions centered on the problems she faced, the fear she was experiencing and the goals she was seeking.
In brief, her circumstances were as follows:
1. Her husband had retired a few years before his death and had been getting Social Security and a pension from his government job. She was unaware of the benefits that might be payable to her from either source of income. Her husband had been a very good provider and had handled all of the finances for many years, including pensions, mortgages, savings and investments. She felt very inadequate having to manage all of these at a time of grief, trauma and vulnerability. She needed to figure out how much income she would now have for her own support, alone.
2. Her home was paid for and worth about $400,000. It was not large, but now seemed big and empty to her. She had no debts. She was considering selling her home and downsizing. Was this a good idea?
3. Aside from the pension, she and her husband had accumulated about $650,000 in a taxable investment account that was invested about 60% in bonds and 40% in individual stocks. She had no ability to manage them by herself. She knew very little about any of the companies representing the stocks and absolutely nothing about any of the bonds except that the bonds produced taxable interest of about $8,000 per year. She was unaware of whether or not the stocks produced any income, and if so, how much.
After meeting several times, her financial planner decided to first determine what survivor income benefits Elizabeth would receive. At the same time, she and the financial planner worked out a budget that she could follow in order to stay within her income, be comfortable, have enough savings for emergencies and maintain the lifestyle that she wanted. Doing this took about 3 months and gave Elizabeth a great deal of confidence and certainty that she could manage her money herself. She was very proud of being self-sufficient and able to stay afloat financially. She had said several times during meetings with her financial planner that she did not want to turn her finances over to her children, even though they were willing and able to help, so learning how to do it herself was a very important achievement for her.
The combined work of Elizabeth and her financial planner revealed that her husband had waited until age 70 to start his Social Security benefit. He had maximized it by a return of 8% more per year in income than he would have gotten if he had started Social Security income at age 65, by waiting until age 70 to start taking it, resulting in about $2,800 per month. Elizabeth was surprised to find out that she was entitled to a benefit herself, of 50% of that amount, which was $1,400 per month as his survivor, even though she had not worked for pay for almost 35 years. It was a pleasant surprise!
The next issue they tacked was the pension from her husband’s job. She learned that he had chosen a joint and survivor benefit that would pay her 75% of his benefit, for her lifetime, in the event of his death before hers. That amount was $60,750 per year, or $5,062.50 per month. In addition, as his survivor, he had elected to continue medical insurance for her until she qualified for Medicare, eliminating a very big risk of catastrophic medical expenses, something she had not thought about at all. Again, another very important issue was solved and she was learning even more about managing her money and making good financial decisions for herself.
The next issue was the house. Keep it or sell it? Move and downsize or sit alone in the home that they had shared together for so many years and raised their kids in? After some heartfelt conversations about home and hearth, her financial planner advised her to put off making this decision for at least a year, maybe two years. The reasons are more psychological than financial, but just as valid.
Grief counselors caution new widows and widowers to wait because their professional experience indicates that the emotional stresses of being widowed are life changing events that, coupled with an additional life changing event like moving, are simply too much for most people to bear.
In addition, studies have shown that selling the home too soon after the death of a spouse is usually a mistake. Seller’s remorse is commonly reported, as is selling at too low a price. In addition, the same people who sell too soon often buy a replacement home that they pay too much for and later regret owning, according to candid remarks in surveys of widowed people. Knowing this, her financial planner suggested that she wait a year or two, use that time to study the real estate market in her desired neighborhoods, identify the things about her present home that she liked and disliked, and reconsider the idea after that. Elizabeth agreed and put the sale of her home on her emotional back burner.
Finally, analysis of the investments indicated that with some changes in the portfolio, such as reducing the relying on low interest rate bonds and switching from individual stocks to exchange traded stock funds could not only reduce her exposure to risks of the market but would also net her a significant increase in income from the portfolio. After doing this for a year, her portfolio of moderate to low risk stock and bond funds was able to produce income to her of about $11,000 in stock dividends, $5,200 in bond interest and $10,000 in long term capital gains, for a total potential income to her of $26,200. If the portfolio was able to average these kinds of modest returns, she would preserve most of the principal of the entire portfolio for her heirs, which was an attainable goal that she would very likely be able to achieve. However, on the flip side of this goal of preserving principal, she was reasonably assured that if she needed a large sum for a good reason, like a medical expense, she had it and was protected. Elizabeth now had a plan, a conservative strategy for moderate returns without undue risk and a professional relationship to keep her on track. She was able to pay attention to her own well-being, go through the stages of grief without the additional stress of financial uncertainty and move on with her life.
It has now been almost 10 years and Elizabeth is finally ready to downsize and settle into a small house in a town near the city where she had lived for all of her marriage. She is secure and fully capable of managing her money. She makes good decisions. She is active in volunteer organizations and serves on the board of one of them. Her health remains good and she is raising a puppy that she loves. What a transformation, and a story with a happy ending.
On the Web:
Representations of fact and opinions in comments posted are solely those of the individual posters and do not represent the opinions of Sitnews.
E-mail your news, photos
& letters to firstname.lastname@example.org