Prepare a financial plan that will protect your spouse after you die or if you become seriously ill. By Susan B. Garland, Contributing Editor April 23, 2009 EDITOR'S NOTE: This article was originally published in the February 2009 issue of Kiplinger's Retirement Report. To subscribe, click here.You can rarely go wrong with flowers or a candlelit dinner for a special occasion. But if you want to give your spouse a really nice gift, draw up a financial plan that will provide lifelong care for your significant other if you die first or become incapacitated. Statistics show that it's likely the husband will die first. About 75% of those 85 and older are widows, according to the Women's Institute for a Secure Retirement. On average, the group adds, widowhood leads to a 20% decline in income, after adjusting for consumption needs. Widowers face financial challenges, too, of course. You're probably thinking that your estate plan will take care of your spouse. That's a great start. But make sure you consider other safeguards, from possibly boosting Social Security survivor benefits to tutoring your spouse on the family's investments. And don't forget the flowers. Pump Up Retirement Savings Topping the gift list is a bigger nest egg. If you or your spouse, or both, are still working, try to hang in longer than planned. Besides adding to your 401(k) or IRA, additional work years could make you eligible for a larger pension and Social Security benefits. A study by T. Rowe Price shows that a few extra work years can help a lot. By postponing retirement to age 65, from 62, you can increase your annual retirement income from investments by an inflation-adjusted 22%, assuming that you save 15% of your salary. (The study assumes that rather than starting to tap a $500,000 nest egg at age 62, you instead add about $15,000 a year to the pot, and that it grows at an average 6.7% a year.) Advertisement Also, postponing Social Security benefits will increase a retiree's income. Collecting benefits at 70, rather than at the early retirement age of 62, can boost the purchasing power of these benefits by 88%, the T. Rowe Price analysis found. A delay will increase the survivor benefit, too. The lower-earning spouse, usually the wife, is entitled to a survivor benefit equal to her husband's benefit. But if a husband born between 1943 and 1954 claims at 62, he permanently reduces his benefits by 25% from what he would receive if he claimed at his full retirement age of 66. For each year he delays beyond 66, he'll get an 8% boost in benefits. "When a worker dies, the widow will get 100%. The bigger the benefit, the better," says Laurel Beedon, senior policy analyst at the women's institute. That's what Wayne Huck, 66, figured when he decided to wait until 70 to claim his benefits. His wife, Mary, 64, recently applied for benefits based on her own much lower earnings. If Wayne dies first, Mary can switch to the higher survivor benefit. "This will give her a nice annuity if something happens to me down the road," says Huck, a certified public accountant in Wethersfield, Conn. Until he collects his own benefit, Huck will collect a spousal benefit equal to 50% of Mary's. This strategy of restricting an application to spousal benefits works only when the higher-earning spouse has reached full retirement age. Once he turns 70, Huck will apply for his own benefit. Advertisement Besides maximizing Social Security payments, both spouses should take full advantage of tax-deferred accounts. If you're not both working, remember that a working spouse can invest in a spousal IRA for a nonworking husband or wife. The nonworking spouse can make a deductible contribution of up to $5,000 to a traditional or Roth IRA, plus an extra $1,000 if he or she is 50 or older. Get Up to Speed on the Finances In many marriages, one spouse takes the lead on investments and record keeping. If that spouse dies first or becomes incapacitated, the other is left scrambling to find documents and to figure out how much income is due from annuities and dividends. To avoid that, the person in control of the portfolio should review all investments with the other spouse. It's also a good idea for spouses to write each other a "love letter" -- not the mushy kind, but a document that leaves instructions for the surviving spouse. The document could include everything from when to pay certain bills to funeral plans. Keith Klovee-Smith, 60, and his wife, Susan, 64, have written such a document, which they call "In the Unlikely Event of Death." He is senior vice-president and national manager of Olympia, Wash.–based Wells Fargo Elder Services, which coordinates legal, financial and medical services for aging clients. Advertisement The couple's document, which is compiled in a three-ring binder, includes powers of attorney, copies of insurance policies, information on company benefits and, Klovee-Smith says, "anything that would remotely touch an estate." He and his wife regularly update the information. "In our desire to keep it up, we find that it provokes conversation that is healthy for our marriage and our ultimate plans," he says. In his job, Klovee-Smith sees firsthand what happens when a surviving spouse is left in the dark: "A person may have taken out different insurance products over a lifetime, but then may have forgotten about them." A love letter "forces people to look at everything," he says. You also need a plan for cash flow after the death of a spouse. If bank and brokerage accounts are in the name of one spouse, retitle assets so at least some money is held jointly, or you can name the spouse as a beneficiary on a "payable on death" account, says Susan Fenimore, a certified financial planner at Financial Consulate, in Hunt Valley, Md. Otherwise, Fenimore says, "a checking account will be tied up in probate, and your spouse won't have immediate access to cash." Plan for a Serious Illness The older a couple gets, the more likely a serious illness will leave at least one spouse temporarily or permanently incapacitated. Preparing for such an event is likely to require the help of an estate-planning lawyer. Note that state laws vary. Advertisement Both spouses should draft durable financial and health-care powers of attorney, says Robert Romanoff, who heads the Asset Planning and Preservation Service Group at the law firm of Levenfeld Pearlstein, in Chicago. Romanoff says the financial document will give your spouse or other agent the authority to pay expenses if you become incapacitated. This is especially important if the disabled spouse, perhaps the husband, holds most assets in his name. If the wife does not have the power of attorney, Romanoff says, "she is not authorized to manage the accounts." Regarding health care, many states give a spouse the right to make medical decisions for the sick spouse, but others don't. A couple should discuss the types of treatments that would be provided or withheld. Such talks can ease the burden for authorized agents, who won't have to make heart-wrenching decisions on their own. "Their job is to carry out your wishes," Romanoff says. If your spouse is already chronically ill, consider setting up a special-needs trust to arrange for the management of your spouse's finances and caregiving in the event you die first, says Peter Strauss, a senior counsel at Epstein Becker Green, in New York City. Say you have a serious heart ailment and your wife has Alzheimer's or another condition that impairs her decision-making capability. "You don't want to leave the money outright to the spouse because she can't manage it and could be subject to financial abuse," Strauss says. You would transfer enough money to the trust to support your wife after you die. The trustee you select would make the investment decisions and pay for the surviving spouse's care. The caregiving spouse should also arrange for someone to oversee the spouse's ongoing care. The spouse could direct the trust to hire a professional care manager who, says Strauss, "could come into the picture to supervise and monitor the home care when the caregiving spouse dies." Each spouse needs to make sure that the other has enough money to live on in case one needs long-term care down the road. "A long nursing-home stay could drain all of your resources," says Fenimore. "It could leave the surviving spouse with nothing." Consider long-term-care insurance. One option for married couples is a shared-care policy, with perhaps a total of five years of coverage. If one spouse needs two years of coverage, the other can use the remaining three years. Or one spouse can use all of it. A Pension With Lifetime Protection If you're approaching retirement and are due a pension, you face a big decision. Do you take a joint-and-survivor option, which reduces the monthly payment but continues through both your own and your spouse's lifetime? Or do you take a single-life annuity that pays a larger benefit but ends at your death? Many financial experts say most couples should take the joint-and-survivor option. In fact, federal law requires the joint-and-survivor option, unless your spouse waives his or her right to it. Be careful here. Rebecca Davis, staff attorney at the Pension Rights Center, in Washington, D.C., says her organization gets calls from surviving spouses who had signed away their rights to the lifetime annuity. "They thought it was a formality," Davis says. "They didn't understand what they were signing." If you choose the joint-and-survivor option, the survivor's benefit will be a percentage of the monthly pension you receive -- 50%, 75% or even 100%. Say a husband is eligible for a monthly single annuity of $2,000, and he and his wife decide to use the 50% option. The monthly benefit would be trimmed, perhaps by 10%, to $1,800. After the retired worker dies, the surviving spouse will get $900 a month -- 50% of the reduced benefit -- until death. With the 75% option, the surviving spouse would get 75% of that reduced benefit. For more authoritative guidance on retirement investing, slashing taxes and getting the best health care, click here for a FREE sample issue of Kiplinger's Retirement Report.