What are Survivor Income Ratios?

Planning for couples includes understanding how income could change upon the death of one spouse. Survivor Income Ratios estimate this change for each spouse/partner. These statistics allow an advisor to have a discussion with clients about whether the income available to a surviving spouse would be sufficient to support their lifestyle.

How are Survivor Ratios Calculated?

Income Lab calculates the Survivor Income Ratio of spouse A by calculating income for the plan if spouse B were not in the plan. That means any income stream that depends on spouse B would be removed and any adjustment to income streams on spouse B's death would be taken into account.

This calculation also takes into account the change in planning horizon that would occur if spouse A were single. Single life expectancy is always less than joint life expectancy, so it is important to take this into account when providing context on what a plan might look like with one spouse gone.

The survivor income ratio calculation assumes that the same investment assets are available to both spouses.

Example

For example, let's assume a household has a 65-year-old male/female couple with $1 million invested in a 60/40 stock/bond portfolio and a joint pension of $4000/month, adjusted for inflation, with 75% survivorship.

The couple decides on a 30.75 year joint planning horizon (a slightly above-average joint lifetime for a couple this age), which gives them $7236/month in retirement income ($4000 pension + $3236 in portfolio withdrawals).

Since $4000 of this joint income is from their pension, we might think that if either spouse were to pass away, the surviving spouse's income would be $6236 ($3000 pension + $3236 in portfolio withdrawals) due to the loss of 25% ($1000/month) of the pension. This would result in Survivor Income Ratios of 86.2%.

However, because single life expectancy is always less than joint life expectancy, the hypothetical proposed income for each spouse if they were single is higher: the husband would lose only about 5% of joint income, while the wife loses just over 7%. (The wife's single planning horizon is longer than the husband's, even though they are the same age.) The shorter planning horizon for each spouse in a hypothetical single situation makes up for some of the lost income.
 

How can I improve a plan’s Survivor Income Ratios?

Low "Survivor Income Ratios" generally arise when a household has a high level of non-portfolio retirement income tied to one member of the household. These might be income sources like single-life pensions and annuities that would decrease or disappear upon the death of one spouse.

It can be difficult to adjust these income streams if they are already in place. But, if there are decisions to be made regarding outside income sources, such as choosing between joint and single-life pensions or annuities, a joint option will generally result in higher survivor income ratios. (Though note that joint pensions and annuities will also generally have a lower monthly income amount, so you'll want to explore all options.)

Plan changes that result in higher proposed income, and therefore, higher portfolio withdrawals, will also raise survivor income ratios. Keep in mind, however, that these changes often bring with them other risks that need to be considered. Changes to plan settings should only be made if they match a household’s needs, tolerance for risk, and ability to accept risk.