Tuesday, November 21, 2017

Survivor Payments Anticipated After First Death Within the Couple

Almost immediately after releasing our new Actuarial Budget Calculators for couples, we began to receive questions on how to handle payments anticipated after the first death within the couple.  Such payments could occur, for example, if
  • One or both of the couple have a joint and survivor form of life annuity, 
  • One of the spouses is eligible for a larger monthly benefit from Social Security or Canada Pension Plan upon the first death within the couple, or 
  • One of the spouses may receive a lump sum or annuity upon death from a life insurance policy.
At this time, we don’t plan to modify our simple spreadsheets to calculate the present value of these various types of survivor benefits.

However, in this post, we will address how you can estimate the additional present values of these survivor payments using the Present Value Calculator spreadsheet, and then add the calculated present values to the “present value of other sources of income” input item in the ABC spreadsheets, to refine the calculation of your current spending budget.

We will use the following example of the retired couple of John and Mary and our ABC for Retired Couples to illustrate how this calculation could be done.


Assume the following information for John and Mary:

  • John is age 65 and Mary is age 60 and are both retired. 
  • Neither of the couple has part-time employment income. 
  • John has a monthly Social Security benefit of $2,000 that he is currently receiving and Mary anticipates receiving a Social Security benefit of $2,800 per month payable in future dollars when she reaches age 70. 
  • John also has a pension benefit of $2,600 per month which is payable for his life with 50% of his benefit ($1,300 per month) payable to Mary after his death as long as she lives. 
  • He also has a paid-up life insurance policy that will pay Mary $100,000 when he dies. 
  • Mary has no lifetime income benefits other than her Social Security and she has no life insurance. 
  • Because Mary has significant Social Security benefits on her own, she does not expect her Social Security benefit to change on John’s death. 
  • They have accumulated savings of $500,000. 
  • They also have equity in their home, but they have decided such equity will be used to cover any long-term care costs they may incur. 
  • They assume unexpected expenses with a present value of $75,000 and expenses on final death of $100,000 in today’s dollars.
Assumptions:  John and Mary use the assumptions we recommend to calculate their Actuarial Budget Benchmark (ABB) to determine their 2018 recurring spending budget.  These assumptions include:
  • 4% discount rate 
  • 2% assumed rate of inflation 
  • 2% annual increases in their future desired spending budget 
  • 33% decrease in the spending budget upon the first death within the couple
They go to the Actuaries Longevity Illustrator and enter their birthdates, their genders, “no smoking” and “excellent general health” on the first page of this tool.  The planning horizon section on the results page tells them that the 25% chance (or probability) of survival is 29 years for John, 37 years for Mary, 37 years for “either alive” and 26 years for “both alive.”

To reflect the anticipated death benefits payable to Mary after John’s assumed death in the current year’s spending budget, they need to add the present value of the anticipated death benefits payable to Mary after John’s death in PV Other sources of income item C(26) of the ABC for Retired Couple workbook.  To obtain these present values, they go to our Present Value Calculator V. 1.1 spreadsheet and enter the following items:

For Mary’s expected pension benefits after John’s death (which based on the planning horizon assumptions is expected to occur after 29 years):

  • $15,600 for “p” (which is twelve times the monthly amount Mary would receive: 12 X $1,300 per month) 
  • 29 years of deferral for “t” 
  • 8 years of payment for “n” (which is the difference between Mary’s assumed planning years until her demise of 37 minus John’s assumed planning years until his demise of 29) 
  • 4% for “i” 
  • 0% for “k.
This produces a present value of $35,025, as shown in I(15).

The present value of John’s life insurance policy is $32,065, and is determined by entering:

  • $100,000 for “p” 
  • 29 years for “t” 
  • 0 years of payment 
  • 4% for “t” 
  • 0% for “k.
(click to enlarge)

The screen shot above shows the amounts that John and Mary enter into the Input portion of the Inputs & Results tab of the ABC for Retired Couples and the results. 

Note that the additional present value of $67,090 inserted in C(26) produces a 3.4% increase in John and Mary’s current spending budget (from $75,298 to $77,893).   This relatively small increase is a function of assuming relatively long lifetime planning periods for budget setting purposes.  The value of these benefits would, of course, be much greater if John were to die in the near future.  Also note that if John were entitled to benefits after Mary’s death, there would be no additional present value of such benefits, as under the planning assumptions, John is assumed to pre-decease Mary.

While we recommend assuming relatively long lifetime planning periods for budget development, it is also important to periodically determine the effect on spending budgets if assumptions about the future are not realized.  In John and Mary’s case, the earlier than expected death of either individual would probably not significantly negatively affect the budget of the surviving individual, but this is something that other couples should examine.

We will address the assessment of risks (that assumptions will not be realized in the future) in our next post.