Adjusting Early Retirement Plans After the Death of a Spouse
Emily and her husband David retired early in June 2018. The plan was to pursue their dreams of living in the mountains of New Hampshire, enjoying an adventurous life with their two sons. Less than 2 years later, David succumbed to a battle with glioblastoma (GBM), an aggressive and lethal brain tumor.
Last week I published part one of my Q&A with Emily. This week I’ll share the second half of our conversation.
We’ll discuss planning blind spots Emily discovered after David’s diagnosis, lessons learned about Social Security and tax planning, and how this all impacts future plans. Emily also shares a final take home lesson for others wrestling with the risks and rewards of retiring sooner….
Did you discover any blind spots or unanticipated challenges when you had to take total control of your financial decisions? Are there any things you wish you had known, better understood, or done differently with the benefit of hindsight?
Oh, yes! There were blind spots and things we hadn’t completely nailed down!
Believe it or not, we hadn’t completely locked in our drawdown strategy. We’d had many conversations about what it would look like. How often would we sell assets? What financial indicators may suggest that we should draw from cash? How and when would we replenish that cash if we used it?
We had a rough plan for what order to tap retirement accounts, but not exactly how and when to rebalance our portfolio. I think that we knew we had enough knowledge to figure the details out together as we went along. However we never had that opportunity.
When David was diagnosed, I didn’t use any drawdown strategy. I just used cash. We think of a cash buffer as a hedge against a market downturn. It’s also a hedge against not having the mental bandwidth to carry out a particular drawdown strategy. In that respect, it served us well.
Many of my financial plans changed after David’s death. In some ways I’m starting our plans from scratch. My Roth Conversion and income strategy is one, and that’s due to my current and future tax filing status. I’m allowed to file as a qualified widower through 2022, which is the same as married filing jointly.
After that, my filing status will change to single. I want to take advantage of this through 2022 and take as much income as I can in these years. Of course, that changes the amount of tax I had planned to pay each year. That in turn changes my drawdown and withdrawal rate.
Another thing that changed is the cost basis of investments. We held our brokerage accounts jointly. I got a step-up in cost basis for 50% of the assets when they transferred to me.
I didn’t have a good plan in place to take advantage of this and made the early mistake of selling assets using average cost, not specific lot. (Editor’s note: If you are not familiar with the ways you can account for cost basis for your taxable accounts, follow the links I inserted for a more detailed explanation of these different methods.)
It turns out that once you have done that on one occasion, it’s very hard to reset the records and choose specific lots in the future. This goes against all our efforts to ‘optimize everything’ financially. I am getting better at embracing the concept of ‘good enough.’
Related: Financial Simplicity — What Is Your Time Worth?
In the FIRE community, we often under appreciate Social Security benefits. When we do think of Social Security we tend to focus on retirement benefits. Other aspects of the program including disability and survivor benefits don’t get much attention. Let’s discuss a few aspects of Social Security through the lens of your experience.
Did you explore whether disability benefits are an option once you retire early and don’t have a regular income? If so, can you share your experience and any important lessons?
We went into early retirement with no knowledge whatsoever about Social Security disability benefits. We had dropped our private life insurance and disability policies when we realized we had reached our FI number even prior to quitting work. It made logical sense to us that we should essentially be self-insured for those things.
I quickly learned a lot about Social Security disability once David was diagnosed. To be honest, this was only because I was part of a GBM wives Facebook group. I don’t believe I would have even considered it if it weren’t for that group.
Glioblastoma is one of a small number of conditions that allow for automatic approval for Social Security disability. The application is a little complex, and there is a 6-month waiting period after diagnosis for benefits to begin.
I was surprised that dealing with Social Security was straightforward. Even asking questions on the phone proved them to be informative and helpful. I imagined that if a person were receiving any type of W2 income they would have reduced or no benefits, and David was still receiving deferred compensation.
However, Social Security disability is purely related to your physical and mental ability to work. None of the income we received from elsewhere counted against it. David received a monthly payment until his death, and the kids and I received a smaller one each as dependents.
I’m going to be absolutely honest here and acknowledge that I did feel something of a fraud receiving these payments. We had chosen to quit work after all. We had a significant net worth and something didn’t feel right. It took some time for me to accept that we truly were eligible to receive this money.
David had paid into the system for many years, and the situation would have been the same whether he had taken a small break from work and intended to go back or if he had intended to continue earning in retirement. The simple fact was that he was incapable of working in any form, even if he needed to. I also learned that Social Security is tapped to pay the initial portion of any disability that would have been received from his company had he still been employed.
A couple of additional things I learned about Social Security disability is that 24 months after benefits start (i.e., 2 ½ years after diagnosis) the recipient becomes eligible for Medicare. (Editor’s note: To clarify, these timeframes are specific to the diagnosis for GBM. The poor prognosis associated with this diagnosis gets you fast tracked for Social Security Disability benefits. For many people the process to start getting Social Security disability benefits and then becoming eligible for Medicare is considerably longer.)
Sadly, most people diagnosed with GBM never reach this milestone. Also, Social Security Disability recipients can make early withdrawals from their 401K or IRA without the 10% penalty.
Does your experience with Social Security disability provide any insight that would have changed whether or how much disability insurance you carried while working?
I still believe that cancelling our private life and disability insurance once we were FI was a financially sound decision given our net worth. It does however give me pause to think about the level of insurance we carried while employed and long before we were FI. It was a blind spot in our financial life, and it’s hard to know looking back if it would have been sufficient.
We also tend to under appreciate the impact of Social Security survivor benefits. Would you be willing to share how the survivor benefits work for you and your sons?
Again, I had no knowledge that Social Security survivor benefits existed prior to David’s illness. It’s actually very easy to find out what your surviving dependents would receive based on your Social Security record. If you have an account with SSA.gov it’s on the front page. I personally only receive benefits because I have dependent children. The kids and I each receive a payment each month. Mine will continue until they each reach age 16, and theirs will continue until they reach age 18.
Did you consider these Social Security survivor benefits when working and purchasing life insurance? If not, would your experience change how you made your decisions about life insurance prior to achieving financial independence?
Just like Social Security disability, we had no concept of social security survivor benefits. I mentioned that David was the Social Security guru, but he spent most of his efforts on understanding what Social Security retirement benefits were available to us. Knowing what I know now, it would have been perfectly reasonable to factor these benefits into the level of life insurance we purchased while still working.
Finally, Social Security retirement benefits are an important part of most people’s retirement plan. What have you learned about your future retirement benefits and filing strategies since David’s passing?
I’m lucky that David did a lot of work on understanding our Social Security retirement benefits and left plenty of spreadsheets and information that I have been able to refer back to. Had things not changed, we would likely both have deferred our benefits to maximize their value.
The research I have done so far suggests that now it would be most valuable for me to take my own reduced benefits early at age 62, then switch to David’s full benefit that is available to me at age 67.
Related: When To Take Social Security
Do you anticipate David’s passing will substantially change your retirement projections or force you to alter future plans due to the reduction in anticipated Social Security benefits?
We always treated Social Security retirement benefits as ‘gravy.’ We did our retirement calculations both with and without them, and based most of our plans on not having them. I still view them as ‘nice to have’ but not a guarantee.
As for the rest of our planning, nothing huge has changed. Where my assets are located has changed and simplified as I rolled David’s accounts into mine. Various payouts have been made to me like deferred compensation and a UK pension. Having less bits of money in different places is actually a positive thing.
I still track our monthly spending and income. I track our net worth and withdrawal rate and continue to maintain the same asset allocation we always planned for. One thing that has shifted a little is my pursuit of ‘optimize everything’ to an acceptance of ‘good enough.’ Doing this alone I only have so much desire and time to commit to my finances. Thanks to our detailed work in the past, I can let a few details ride and enjoy the fruits of our planning.
Taxes are another variable that changes greatly after the death of a spouse. Instead of being able to spread your income across wider tax brackets when married filing jointly, you now have to squeeze income into narrower brackets when filing as a single.
What actions are you taking at this time to adjust your tax planning?
Taxes are something that have changed significantly. As we approached retirement, we planned to keep our income as low as possible in the pursuit of close to zero taxes, and accessing ACA subsidies. Now that I can file as a Qualified Widower through 2022 and have COBRA healthcare throughout the same period, I am treating these years as high-income years.
This means that I’m bringing in any taxable assets I can in these years before my filing status reverts to single. This includes liquidating a non-traded REIT as soon as I am allowed, (Never buy a non-traded REIT!), looking at bringing over a pension I have in the UK, and carrying out Roth conversions to take my income up to the top of the 24% tax bracket. Having been aiming for 0% tax liability, 24% is about all I can stomach!
As I mentioned earlier, allowing this tax liability each year changes my current withdrawal rate from my portfolio, and that’s a factor I have to balance along with future tax needs.
I’m very fortunate to have an excellent tax advisor who I tend to use as a sounding board. He generally agrees with my strategies, and is able to tweak and optimize them for me. Tax preparation and advice is one area that David and I had planned to stop paying for and handle ourselves. At the moment I’m happy to have the peace of mind of a second pair of eyes on my calculations.
Related: 5 Times You Should Pay For Financial Advice
With the benefit of hindsight, are there things you would have done differently from a tax planning perspective?
I’m grateful that we had a good handle on post-retirement taxes. That allowed me to pivot as necessary. One thing that I should bring up as part of the tax planning conversation is estate planning.
David and I did all of our estate planning when our second son was born. This included wills, advance directives, power of attorney, and opening revocable trusts for each of us. When David received his diagnosis, I went through the process of ensuring that these records were accurate and updated.
Like many other people, we were lax about actually funding our revocable trusts. When we simplified our finances and removed them from the grasp of a financial advisor around 10 years ago, many of our assets were removed from the trusts and never replaced.
When David was diagnosed, our tax advisor recommended that we placed most of our assets in David’s trust so that they would flow directly to me, and I could take advantage of the full step-up in cost basis on his passing. Taking this action is in hindsight something I should absolutely have done. But at the same time, it is something I still don’t regret not doing.
This is where the balance between taking logical actions, and having the emotional ability to do them comes into play. I was proactively dealing with several financial yet emotional tasks in the time after David’s diagnosis, and renaming accounts was just too much. I also wanted to protect David from having to go through the emotionally wrenching and taxing process.
So, our assets remained where they were. Still, I knew that I wasn’t creating a mess for myself by not doing this. Our assets were all jointly held with rights of survivorship, and I was named as beneficiary on all his retirement and work accounts.
Since David’s death I have moved as much as I can into my trust, including the house. My children are named as beneficiaries and I hope that the situation I will leave them with is as simple to navigate as possible.
Is there anything else I should have asked you, but I didn’t? With the benefit of hindsight, would you have done anything else differently to plan for early retirement knowing what you now know?
That’s a tough one. In an ideal world maybe David and I would have sat down and gone through plans for scenarios such as this. Maybe part of our early retirement planning should have included a strategy for each of us to be able to operate solo. To be honest though, we were both so deeply involved with planning, and so conservative around that possible ‘worst case scenario,’ I’m not sure that type of planning would have added significant value.
As David became more ravaged by GBM he looked at our finances a couple of times and said to me, “you know what to do don’t you? Stay the course, toughen up cupcake! You understand all this don’t you?” I was able to say in all honesty that yes, I did know what to do. I would be a tough cupcake. And I did understand it all.
You elegantly shared many key lessons in the original string of Tweets that I re-published on the blog in September 2019. But a lot has changed in your life, and in the world in general, since then.
Would you change or add anything to what you wrote then? Is there a final thought that you would like to leave readers with?
The only learning I can add is not really a financial one. Many of us pursue early retirement in order to focus on our families and the ‘more important’ things in life.
That always was, and still is, my motivation. However, this idea has been brought into even greater focus for me since our early retirement plans began.
Focusing on the more important things in life isn’t about grand gestures or amazing travel adventures. For me it’s now more of a daily pursuit and a habit. It shows up in the smallest moments – how we treat each other and how we help those around us. If I’ve learned anything over the last 3 years it’s that we’re all in this together and we need to look after each other.
Thank you Emily! If someone wants to reach out to you, is there a best way for them to do that?
Yes, @Mr_MrsPieBlog on Twitter.
My Take Home Points
I broke this interview up into two parts because Emily shared so much valuable information about topics that don’t get enough attention.
Don’t waste the valuable insights she provided. Utilize it to take action to improve your financial plans.
Here are the biggest take home points for me:
Many of us are planning for early retirement and may be a decade or two away from traditional retirement age. We often don’t pay much attention to Social Security. Similar to David and Emily’s approach, Kim and I viewed Social Security as a backup to our early retirement plans.
I only took the time to do a deep dive into how retiring early impacts Social Security retirement benefits last year… over two years AFTER leaving my career.
Also like Emily and David, we ignored potential Social Security disability and death benefits. Thus, we likely were unknowingly over insured out of ignorance of this valuable program.
Take some time and familiarize yourself with your Social Security benefits. Make any changes to your financial plans as appropriate.
Last fall I reviewed the NewRetirement PlannerPlus retirement planning tool. During the process of entering our information, we were prompted to check our estate planning documents.
Now nearly one year later, and over three years since we’ve moved from the state where we created these documents, we have still not done that. Use Emily’s experience as a reminder to do these things that we all know we should do.
I will personally hold myself publicly accountable by committing to writing a blog post by the end of this year. I’ll share steps we took and what I learned in the process.
The Little Things ARE the Big Things
Wherever you are on the journey to financial independence and early retirement, we all fall into the trap of failing to appreciate the small day to day things that make life worth living. Don’t focus so much on the many valuable financial lessons shared here over the past two weeks that you miss Emily’s final, and probably most important, point. Make it a habit to stop and smell the roses.
Thanks again to Emily for generously sharing her experiences in an effort to help us all. Share your take home points and any specific questions or words of gratitude for Emily below in the comments or at her Twitter account.
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at firstname.lastname@example.org.]
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Thanks to you and especially Emily for sharing all of this valuable information. What a gift you gave us!
Thank you. My goal was simply to share what I have learned so that others can benefit
Emily was so generous to share these details.
One thing I would add, which was advice from my CPA decades ago: If one of the couple is less involved with the finances, write them a letter each year (after doing the tax returns was my trigger). Outline what they should/should not do if something happens to you, and trusted people they can call upon for advice. Put it in a sealed envelope and put it with your wills.
In Emily’s case, she was intimately involved, so had less ground to cover in coming up to speed. Most couples are more lopsided in the money management.
Regarding the transfer of assets from one spouse to another within one year of death. I think I remember something about the step-up basis not applying to those assets. She did not transfer the jointly owned assets and so she may not have missed a tax advantage.
I know that when you inherit taxable investments that you receive a step-up in basis, but I was not aware there was any step-up when one spouse passes. I should have done better with asking follow-up questions, or doing my own research and inserting relevant links. If you have any sources you would like to share, feel free to do so here and if I find a good resource, I’ll amend the post.
Robert appears to be correct. Search for IRS 1014(e). This article – https://bit.ly/3gpG0EW covers it succinctly. Looks like Emily made the right call by not moving assets.
Thank you all for the discussion. Yes, it’s correct that within a year of a spouses death, there is no tax benefit to making a transfer. I was considering this move early in David’s diagnosis, knowing that the average survival time with GBM is 12-18 months. I knew we had to move fast, and as I alluded to, there are emotional limits on doing this.
I did receive a step up on 50% of our assets as they were jointly owned
Thank you for sharing your experience and insights. I learned a lot and now have some new ideas to explore. You mentioned taking your Social Security benefit at 62. Wouldn’t you be eligible for the survivor benefit at 60?
Emily may or may not care to share more than she already has. I will say that like myself, she is well over a decade from even becoming eligible to claim Social Security retirement benefits, so I don’t know how much thought and effort she has put into that strategy as circumstances will likely change between now and then.
College costs should also be factored into your withdrawal strategy. If you income is low enough, $50M I think, you don’t have to include assets in FAFSA. For high asset-low income people this is substantial. Overlap that wit ACA subsidy and you complicate your most tax efficient withdrawal
I had an email exchange with Mary Beth Franklin on this issue. While I don’t know all the details, my understanding is that you CAN take survivor benefits as early as age 60 but that they will be reduced. I don’t know the formula used for how they are reduced but Mary Beth indicated that in order to maximize your survivor benefits, you should be taking them at your FRA. That is probably why Emily has opted to take her SS early (age 62) knowing that when she reaches her FRA, she can begin taking the survivor benefit in full
For survivor benefits, the widow is eligible to take benefits at age 60. The benefits would be what the spouse would have received at FRA, less a percentage discount (see https://www.ssa.gov/benefits/survivors/ifyou.html for more details).
Note: If you remarry prior to age 60, then this option disappears. If you get married 1 day after you turn 60, then this option is still available.
That leaves her free to then let her own Social security grow and she could then switch to that at age 70, if that would provide a large value.
Chris is right, I have time to finesse this plan!
My current thinking is based on the fact that David was older than me and had a larger SS benefit due to him. If I draw on his benefit as a survivor at age 60 it will be a reduced amount. Switching to my own SS at 62 would likely not be any greater.
If I access my own SS at 62, I can still switch to David’s full amount later. Without doing any in depth math, I think that’s how to get maximum benefit from both plans
Thank you, Chris and Emily! Chris – another extremely valuable post and combined with last week’s – simply incredible. Very grateful for you and especially Emily.
Thanks for always having great articles to read Chris, but a special thanks to Emily for opening up to all of us during such a tragic live event. So many wonderful insights and honesty of preparing for early retirement then having to go thru something like this but as the survivor, you have to keep your family together which also includes the financial sides.
Thanks again to you both !
Like others, I’m also surprised to hear about the step-up cost basis when assets pass to the surviving spouse.
I’ve actually always assumed that married spouses usually have one revocable trust and it’s in their both names, but it sounds that Emily and David had their own individual trusts in her and his own names only, or did I misunderstand this part?
So, if it’s true that the surviving spouse can get the step-up cost-benefit, is it applicable to such special individual trusts only, or does this benefit apply to the ‘joint’ trust of both spouses, but we never heard about it?
What about the spouses that choose not to create a revocable trust and hold their brokerage accounts jointly? Emily alludes that such accounts do not get a step-up basis.
This is very surprising news to me and I wonder if this treatment is specific to the state in which they got their *individual* trusts created or available nationwide? The lawyer who drew our trust (one trust for both of us) didn’t mention anything differently, but we did it 10 years ago, so maybe stuff has changed.
Very informative! I hope Emily is doing a little bit better. I appreciate her willingness to share her difficult experiences and help others in the process.
You’re conflating two issues:
(a) Step up basis on a taxable account and
(b) creating a revocable trust.
This article gives a good explanation of how the step up basis works for jointly-held, taxable investments. https://www.kiplinger.com/article/retirement/t021-c032-s014-a-widow-s-broker-made-a-huge-mistake.html
With regards to the necessity and usefulness of trusts, that is a more complex issue and probably worth it’s own blog post which is now on my to do list. Stay tuned.
Regarding Medicare, eligibility after being on SSDI for 24 months is not specific to this particular diagnosis. That’s just the typical rule for eligibility.
(Just trying to clarify that it’s the disability process itself that was fast-tracked. The “24 months after disability” period is typical.)
Yes! Based on my experience in my prior life as a PT, I know it can, and often does, take years to be approved for disability benefits. GBM gets you fast tracked, because it’s a clear cut diagnosis with a horrible prognosis. That was the point I was trying to clarify, but may have actually made more confusing.
Thanks for chiming in and sharing those resources about Medicare eligibility. Unfortunately, as Emily made clear, Medicare is a moot point for most with a diagnosis of GBM because most, like David, don’t survive two years after diagnosis. It is an important planning point for many people though.
Emily mentioned her tax filing status would be Single after the time allowed for qualified widow. With two dependent children, it will actually go to Head of Household, which is better than Single.
You make a good point. For those who this may help, the technical term for the rules Emily pointed out is filing as a Qualifying Widow(er). Then as you point out, the widow(er) could qualify as head of household (with a larger standard deduction and wider tax brackets than single) for as long as they have dependent children in the home, before eventually filing as single.
Thanks for the helpful comment!
Lot’s of info here on Social Security disability that I never knew before.
It’s a blind spot for many, myself included.
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