There are turning points in life that prompt important financial decisions. What you choose to do—or not do—at such times can have a significant impact on your long-term financial well-being. The death of a spouse is one such turning point.
Of course, it’s an emotionally painful time. But it can become financially painful as well if you’re not careful. This article highlights one of the most common financial mistakes made at this difficult time, describes several manifestations of the mistake, and suggests better steps to take instead.
Setting the scene
According to the U.S. Census Bureau, 80% of married women live longer than their husbands, and on average, widows live an additional 14 years after their spouse’s death.
All told, about 800,000 women become widows each year, and there are nearly four times as many widows as widowers — 11.3 million vs. 2.6 million, according to the Center for Retirement Research at Boston College.
Complicating matters for the spouse left behind is the tendency—historically, anyway—for men to make most of their household’s financial decisions. That can leave widows unprepared for the day-to-day management of their finances and vulnerable to mistakes.
An informal survey of several financial advisors generated a unanimous conclusion: The single biggest mistake a widow or widower can make after the death of their spouse is to make any significant financial decisions quickly.
“Sometimes widows are inclined to quickly make far-reaching financial decisions that don’t need to be made right away,” says Dan Hardt, a financial advisor in Louisville, KY. “This could include selling the house or investing in something that involves a long-term commitment such as an annuity with surrender charges, or an illiquid investment. It could even include lending money to family or friends. A widow’s perspective six months after her husband’s death is often very different than it is a few weeks after his death. My advice: don’t make any significant financial decisions right away that don’t have to be made so quickly.”
Unfortunately, people with financial products to sell often target grieving widows. Products promising guaranteed income may seem especially appealing.
“The most egregious thing I’ve seen happened to a client of mine before I started working with her,” recalls Albuquerque, N.M., advisor Jenny Migdal. “Her husband dropped dead suddenly in his 50s. Someone in her church referred her to an insurance agent who sold her an annuity, tying up $500K of the life-insurance benefit she received. He never even asked her about living expenses or health-care expenses, and she ended up having to drive a school bus to be able to get health insurance.”
It is wise to prepare for the death of a spouse well before that time comes. That means carefully considering what would happen to your household’s finances if you die first, or if your spouse dies first.
How much income would be needed? What would be the impact on your Social Security benefits or pension? Would such income be reduced? How might it be replaced? Would a deferred annuity make sense for you?
How much, if any, life insurance would there be and how should that be used? If possible, commit in advance to protecting the principal. “I have found that some of my young widows’ spending was way too high in the first two years after the husband’s death,” says Migdal. Among the reasons she’s seen: “A family trip to Europe as grief avoidance/remembrance, moving expenses, a new car because of fear about maintenance, and paying off the mortgage immediately without any analysis.”
Other questions to consider now include: What would you do with your house? And to whom would you turn for trustworthy financial advice?
Make sure both spouses have met and are comfortable with any financial professionals you use—an attorney, accountant, life-insurance agent, property- and casualty-insurance agent, and financial advisor.
This is a step Dixie Fraley strongly advocates. Her husband, Robert, was a sports agent who died in the same plane crash that took the life of professional golfer Payne Stewart in 1999. Long before that tragic day, Robert had established a routine of having Dixie with him to meet face-to-face with all of their financial advisors once a year. Those meetings left her well prepared to deal with financial matters after Robert’s death.
Knowing whom to contact for financial counsel after your spouse dies is very important. For example, the process of rolling over a 401(k) or IRA to your own account involves navigating IRS landmines and requires trustworthy, experienced guidance.
Another factor couples should consider is this: An illness that takes the life of the first spouse may also take a devastating toll on their household’s finances.
Brad Brestel worked as an attorney and financial planner before becoming Generous Living Pastor at Lincoln Berean Church in Lincoln, Neb. “All I have to do is walk downstairs and look at our senior citizen-age class,” he says. “Mostly women. Not rich women. They were a lot better off financially before their husbands went through their final illness and the expenses of that.”
To prevent that from being your story, think through how you would cover the cost of a long illness experienced by you or your spouse. Especially if you have a family history of dementia, you may want to consider long-term care insurance. Adequate life insurance could replenish a retirement account if such funds are needed to pay for healthcare.
Financially speaking, what should you do after the death of your spouse? In short, hold off on any major financial decisions for the first six to 12 months. Of course, some steps will need to be taken. You must notify the Social Security Administration and your financial institutions, update beneficiary designations, and pay bills. If your spouse had life insurance, you will need to file a claim.
For other decisions, such as paying off or selling your home, gifting money to adult children, or buying an annuity, give it some time and seek wise counsel.