Recently an adviser told me about a client who came to him in tears, hoping the adviser could help with a pressing family issue. The client’s 80 year old mother (not a client) was diagnosed with brain cancer and is not expected to survive for very long. The family discovered that the mother’s government pension will not survive her as she chose the greater single life option many years ago. The mother and her husband, client’s father, relied on the pension as their primary source of retirement income and the father will be in a difficult financial position after the mother’s death.
Actuaries will tell you that in the not uncommon situation of a married male of roughly the same age or older than his wife, it is very likely the wife will outlive him, often by many years. But math does not tell you that her survival is a sure thing and making a pension option selection based simply on “the odds” may leave one in a difficult position as in this case. Because life is not a sure thing, it is important for folks – clients if you will – to plan how they will handle the what ifs, the uncertainties if things do not go just as planned. It does not mean that choosing the one life only/no survivor pension is necessarily wrong but that if that option is chosen, how do we plan to address the situation where the pensioner unexpectedly dies first?
Making sure that one’s spouse and family members are provided for in the event of early death is one of the basic steps in financial planning. This is so largely because even if that early death is very unlikely, the costs and problems it carries with it are enormous. There are many ways to address that possibility and your adviser should be able to provide useful suggestions to you.
This case also highlights the need to fully understand what you are choosing when you make a decision on a particular pension option. There are always trade offs and risks in any such situation and making an informed decision – rather than automatically reaching for the largest payment – is critical to your having confidence in your choice and your financial plan.