Becoming a widow can obviously be difficult from a number of viewpoints. The grieving process, although extremely important to experience in your own time and in an authentic manner, is a journey that can feel like an emotional roller coaster. Besides the emotional aspect to losing your spouse, there are financial concerns that you may have and should address. To address your financial concerns, six key steps should initially be made.
I should make some general comments before addressing the top six financial steps to take early in your widowhood journey. Most of these steps do not involve making major financial decisions – rather, they are meant to provide an assessment and clarity on where you stand today to lay the groundwork for making rational financial decisions down the road.
First, know that most financial decisions do not likely need to be made right away after your spouse’s death. While there are obviously final resting decisions to make – and these can seem daunting as well – most of the financial decisions can be made after you have gone through the initial stages of grief. No decisions should be rushed, and no family member or financial advisor should give you an unreasonable deadline to make certain decisions. Second, know that there are some financial To Dos that may need to be addressed in the short term. This is not in contrast to the first statement as these are more administrative matters that should be addressed rather than major financial decisions. Third, just as in grief, it is wise to seek the help of one – or, even better – two other individuals to help make financial decisions. Wise counsel is always helpful, and such help is even better when one may still be grieving. A combination of a family member and a professional financial advisor that addresses issues from a holistic perspective may be the right team to help you make the right decisions.
With that groundwork laid, let’s review the top six steps to take to address your financial concerns. They include the following:
- Writing down your financial concerns,
- Understanding your monthly and annual cash flow numbers (think income sources and budgeting),
- Developing a net worth statement,
- Reviewing your emergency fund,
- Writing down your insurance proceeds, and
- Understanding your asset allocation.
Writing your financial concerns down is the first step in giving you a peace of mind in your financial journey. You likely still have many thoughts and emotions about your spouse and family during widowhood, and these thoughts may be intermittent, frustrating, and confusing. Add to that the many financial issues that you may be wrestling with, and it is hard to keep it all straight.
Writing down a list of concerns will not only help provide peace, but it will help you and your advisors begin to address those issues in due time. Some issues may be easy to clear up while others may require more research and implementation. Note that at this stage this does not necessarily mean writing down your financial goals, although it could if you do have clarity on a certain goal. Writing down goals will come down the road as you move from the “why me” stage into the “what’s next” stage.
Second, developing an understanding of your income and expenses should also be done relatively soon. You may already have a good grasp of this, but there are obviously changes in a family’s income upon the death of a spouse. If your spouse was already retired, income sources from a pension or annuity, Social Security, and required distributions should be reviewed. Perhaps a pension will continue at full benefit or it may be cut in half or even eliminated. It depends on the type of pension chosen. Understanding what payouts have a cost-of-living adjustment will also be important for the long-term.
In addition to understanding the income sources, the budget should be reviewed for a number of reasons. The primary reason is to ensure you have the income flow to meet such expenses. If the expenses exceed the income, then obviously you will need to assess what asset will be used to help cover the deficit (e.g., cash account, investment portfolio, insurance proceeds). Understanding the budget may also help you consider what expenses can be cut. If your spouse was paying for something that you do not use, you can likely save expenses by cancelling the contract or discontinuing the payments. Finally, the budgeting process will help you determine how the bills are being paid and confirm that they will continue to be paid in a timely manner. If a certain bill was being paid out of the spouse’s account and it is now closed, then this automatic payment source should obviously be changed. While there are benefits of reviewing income and expenses in the short-term, eventually it will likely be wise to have a professional prepare cash flow and net worth projections to provide clarity on the long-term financial health of your situation.
Third, developing a net worth statement is also obviously important as well. You likely got a start on this with the probate process. The net worth statement includes listing your assets at fair market value and the current amount of liabilities. Ideally, the net worth statement will categorize the type of assets in something similar to this: cash (or short-term liquid assets), taxable investments (e.g., brokerage account that is not in a tax-deferred plan), tax deferred vehicles (401(k)s, IRAs), tax free vehicles (Roth IRA), and real estate.
This may be more difficult than it sounds because in many cases the structure and type of assets may have made perfect sense to the deceased individual, but it may be more convoluted from the perspective of the survivor who may not have dealt with all of the assets. It is important to categorize the assets because there will be decisions to be made down the road including whether and how to withdraw from these assets and what assets need to be reviewed for beneficiary designations. If you are ambitious at this stage, it will also be important to understand the cost basis of these assets as that will impact the potential tax consequences down the road.
The fourth task is critical. Related to developing the net worth statement is assessing the adequacy of the emergency fund. Is there enough cash to cover the immediate expenses as well as other major expenses that may be lurking in the background? Laying out the cash or short-term liquid accounts – which may include insurance proceeds – and comparing that to the monthly expenses should provide clarity on future steps to make. Assessing the emergency fund should also not merely focus on whether there is enough, but it may also include assessing whether there is adequate interest being earned on these funds. Often times, widows may be flush with cash for a number of reasons, including that’s how they have always done it (conservative cash account because of the behavioral finance issues with the stock market) or because there was an influx of insurance proceeds. Along the lines of getting a better interest rate is the idea that perhaps some of this cash can be tied to longer term goals and thus be partially invested in longer term vehicles such as the stock market; however, this step should only be done after fully assessing one’s short-term, mid-term, and longer-term needs.
After having assessed the emergency fund, you should also assess the life insurance proceeds that have been or should be received, if any. Again, you probably have a good grasp of this if you have been through the probate process already. Reviewing your insurance files, the checking account, and your spouse’s pay stub and/or employer benefits (if the spouse was working) will be critical to ensure all of the insurance is captured. To obtain the benefits, you will need to file a claim along with a certified copy of the death certificate to the insurance company. They will generally pay the benefit within 30 – 60 days of filing the claim.
No decisions should be made at this point other than to avoid saying “yes” to the insurance representative that may encourage you to elect the annuity payout option. It is my belief that annuities rarely make sense for widows, yet these financial products are known to be oversold to widows during the grieving process as the insurance representative touts the safety of the annuities in the midst of turbulent markets. There are generally better – and less costly and more flexible – approaches to providing the kind of security that widows may desire.
Finally, developing an understanding of your asset allocation is important early in the financial review process. Do you have the right mix of stocks and bonds in relation to your goals? While the asset allocation may not need to be changed right away, there may be a few items that need to be adjusted. If you will need to live on some of these assets if your income sources are less than your expenses and you find that you are highly concentrated in stocks, then changes should probably be made to your asset allocation because you do not want to have to dip into the stocks to meet your living expense right after a stock market decline. While there are a variety of ways to determine the proper asset allocation, we generally adhere to a matching philosophy in determining the amount and type of bonds to purchase.
Another question regarding asset allocation is whether any concentrated legacy positions are being held. Needless to say, this can create significant risk in the widow’s portfolio. We often see this when the spouse worked for a company for a long-term and “believed” in the company. There was a sense of loyalty and pride in hanging onto the stock. Regardless of the reason the concentrated position was held, a decision should likely be made relatively soon on what to do with the concentrated position.In addition to taking these initial six steps, there are many more financial issues that should be addressed over the next several months and years. The key is to work through these issues in a methodical way and in an integrated manner. Oasis Wealth Planning Advisors, acting as fiduciary financial advisors, takes pride in working with widows throughout Nashville and beyond by helping them gain clarity on their finances and traveling the journey with them.