Losing a spouse is devastating in so many ways. Financially speaking, losing your spouse can completely derail your situation.
A recent caller on Suze Orman’s podcast had a question about whether she should choose an annuity or lump sum from her pension upon retirement.
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While this might seem like a straightforward decision, the choice has potential ramifications for the caller’s spouse’s future financial stability.
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Common Assumptions About Money in Widowhood
When you think of a two-person household, it’s tempting to assume that when one spouse passes away, the other will need less money to enjoy the same quality of life. After all, there’s only one mouth to feed. But, generally, that’s not the reality.
In this podcast, the caller wanted advice on choosing between an annuity with monthly payments of $3,300 or a lump sum of $500,000 upon retirement. If the caller died, the annuity would continue with 50% survival benefits for their spouse, which means their spouse’s income would drop from $3,300 to $1,650 per month.
Although the caller seemed to consider this a minor detail, Orman quickly pointed out that the spouse’s future financial stability is at the crux of the matter.
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Why Your Spouse Might Need More Money Than You Think After Your Death
When one spouse passes away, the other still must keep up with housing costs, utility bills and more. While they might find some savings by dropping down to one car or paying less for an individual healthcare plan, the savings might be offset by new expenses.
Overall, the spouse left behind often spends a similar or larger amount, according to Orman. She calls this increase in expenses the loneliness factor.
“When one spouse dies, I call it the loneliness factor where the spouse is lonely, so they actually spend more money,” the expert said in a recent podcast.
For example, your spouse might want to spend more time visiting your kids or eating out with friends to maintain connections after losing a partner. Beyond the potential for more spending due to loneliness, losing a spouse can mean losing multiple streams of income for the household.
“If you happen to die first, your spouse is going to lose half of your pension in this case and also your Social Security or your spouse’s Social Security. One of those will go away whichever one is lower, so their income will go down dramatically,” said Orman.
While losing a spouse can impact men and women financially, the effects have been well-documented on widowed women. For example, the poverty rate of widows is relatively high compared to other demographics. In part, this could be explained by the loss of a spouse’s income.
How to Protect Your Spouse’s Financial Future
Losing a spouse can derail a financial future. But the good news is that you can make choices to protect your spouse’s financial future should they lose you.
In the case of this caller, it’s important to consider the other assets and income streams the couple might have before jumping into the annuity. Since the annuity only has a 50% survivorship benefit, it’s critical to confirm that the spouse would be okay financially if they lost 50% of this income stream.
For example, if the couple is entirely reliant on this income source, then a 50% cut could be devastating. But if the spouse has their own pension income or a robust investment portfolio to support their needs, losing 50% of this income stream might be manageable.
Another way to protect your spouse is to consider a term life insurance policy. If you pass away unexpectedly, the death benefit from a life insurance policy could offer financial stability.
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This article originally appeared on GOBankingRates.com: Suze Orman Explains Why You’re Wrong About How Much Money You’ll Need After Your Spouse Dies
