When Elaine Williams became a widow four years ago at age 47, she took on extra data-entry work to help make up for the loss of her husband's income. She also learned how to make myriad financial decisions, including those related to their three sons, now ages 15, 22, and 23, without his input. "Suddenly, everything is on you," says Williams, who runs a lawn maintenance company in Jewett, N.Y.
Like Williams, widows and widowers often face financial challenges, including sharp drops in income and managing money on their own for the first time. Women are particularly vulnerable to money problems. More than 4 in 10 women 65 and over are widows. And because they have often earned less than their husbands, they may experience a larger income decrease in widowhood. But financial advisers say that smart advance planning can go a long way toward easing many of those hardships. Here are six ways to relieve the financial pressures of widowhood:
Replace lost income. Pension, Social Security, and salary losses can be offset with life insurance proceeds or other sources of money, says Sri Reddy, head of retirement income strategies for ing U.S. Wealth Management. He suggests taking out insurance worth between 10 and 20 times the income that needs to be replaced to make sure the insurance payout after the policyholder's death can generate enough income. A person earning $100,000 a year, for example, would need at least a $1 million policy, an amount that would be unlikely to fully replace the lost income. Of course, taking out insurance earlier in life tends to be cheaper; Reddy estimates that the average industrywide premium on a 20-year, $1 million term life policy on a healthy 30-year-old is around $500 a year.
Some pension plans allow employees to opt for lower payouts while they are living in exchange for higher survivor's benefits after death, which leaves more for the surviving spouse. Mary McGrath, executive vice president at Cozad Asset Management, a financial planning firm in Champaign, Ill., says even couples with other assets should consider selecting an option that allows benefit payments to the surviving spouse after death, because suddenly losing all income adds unnecessary stress to the grieving process. "It's too upsetting to the survivor to have all of the income cease when you die," she says.
Find your "trusted person." Catherine Collinson, president of the Transamerica Center for Retirement Studies, says that single seniors need someone who is able to make financial decisions for them in case they become unable to. She has served as her grandmother's "trusted person," as she calls it, ever since her grandfather passed away. Collinson's grandmother also added her granddaughter's name to all of her bank accounts to make it easier for Collinson to access and manage them in case of an emergency. As a result, five years ago, when her grandmother had a stroke at age 92, Collinson was able to easily step in to pay her grandmother's bills and manage her accounts.
But family members aren't always the best representatives, warns McGrath, because they have an inherent conflict of interest. "Children know that what doesn't get spent becomes theirs," she says. She recommends getting the input of a trustworthy outside financial adviser. Advisers and planners, which are interchangeable terms, although advisers are often associated more with investing, can be found through organizations such as the National Association of Personal Financial Advisors and the Financial Planning Association. Experts recommend meeting with several planners or advisers to ask them about their style, credentials, fee structure, and experience before picking one.
Manage risk. Studies show that women tend to invest more conservatively than men do, which means spouses tend to balance each other out, says Dave Hinnenkamp, president of kdv Wealth Management, a financial planning firm in St. Cloud, Minn. When women become widows, they tend to be overly cautious in their investments, which opens them up to inflation risk. If they are 100 percent invested in bonds, for example, they could outlive their savings. Widowers have the opposite problem and tend to invest too aggressively.