I’ve read various places that you need to prepare 3 scenarios for retirement income: you and your partner happily living a long time together, you living alone after your partner dies unexpectedly young, and your partner living alone after you die unexpectedly young. Most recently, I saw this advice again in the book “Your Retirement Income Blueprint” by Daryl Diamond. For several weeks, I refused to find the numbers and the details because frankly I thought we might be in trouble if one of us dies “early.” We think we’ll have enough retirement income to maintain the lifestyle we have now but I was not so sure one of us would have enough if the other was gone.

Check the Details of Any Work Pension Plans Very Carefully for What Happens After a Death

One of us works at a company that has gone through several major mergers over the past 30 years. The HR Department staff there have to be very flexible thinkers because there are at least 5 different types of pension plans the employees can be enrolled in depending who they worked for pre-merger. This allows us a glimpse into how different plans work when we receive the benefit update booklets.

How Does Your Defined Benefit Pension Plan Change If You Die?

DB Benefits If You Die While Retired

Many Defined Benefit pension plans greatly reduce their monthly payments if the contributor dies. The amount paid may drop to

• 60%,
• 50% or even
• 0% !

of the original amount. That can spell retirement income disaster if the bulk of the expected bill-paying, food-buying, dentist and doctor-expense carrying money was coming from one partner’s DB pension.

DB Benefits If You Die Before You’re Retired

Worse still, though, is what may happen if a person dies before they start to receive their DB pension. Read the details in this section very thoroughly! As someone who has unexpectedly lost 2 non-smoking, fit, good-lifestyle married friends long before 60, I know it can happen to anyone.

For example, in one of the work pensions that we can “eavesdrop” into, we saw that if the person dies before retirement, the spouse receives back only the contributions to the plan. That sounds ok until you realize they are receiving back NONE of the compounding and growth for the 25+ years that the person was enrolled in the pension plan. That lump-sum payment is no where near enough to buy an annuity to generate the same monthly income that the original DB pension promised.

Don’t assume anything. Check the details for your specific DB plan/s.

Can You Depend on Your DB Pension?

Whether or not one of the partners in a relationship dies unexpectedly young, you should also evaluate whether you would be ok if one or both DB pensions is substantially cut or lost. Many DB pension plans have had trouble making promised payouts due to bankruptcies and mismanagement and mis-investment of funds.

Do Defined Contribution, DC, Pensions Offer an Unexpected Safety Net?

Many Defined Contribution pension plans are run on a segregated investment plan basis. The employer and/or employee contributions are channeled into a third-party managed fund. For example, a large company may hire Sun Life or Morneau Shepell to manage the DC pension monies for its staff. In these cases, the DC contribution money and the investment growth it earns are held “in trust” for the employees.

DC Benefits If You Die Before You’re Retired

It is very important to read the details of any DC pensions you are contributing to. They can vary.

Many DC pensions simply assign the entire balance of the DC retirement account to the partner, if he/she has been designated the beneficiary, in the event of a death before retirement. The partner receives the contributions, both employee and vested employer contributions, and the income and growth those contributions have earned.

This can be significantly better, if the employee has been working at a company for a very long time, than what the partner would receive from a DB pension plan payout. This is one case where a DC pension plan may be better than a DB pension.

DC Benefits If You Die While Retired

At the time of retirement, employees usually must choose how to use their DC contributions and growth to create a retirement income. They often can buy an annuity or keep the investments in a type of locked-in retirement income fund like a RIF.

How they choose to wrap-up their DC pension will affect what the surviving partner will receive. If an annuity is purchased, for example, then the terms and conditions of the annuity would decide what the surviving partner gets, if anything.

• Many annuities stop at the time the purchaser dies.
• Others continue to pay benefits but at a greatly reduced rate, such as at 50% of the original rate.

If the funds are transferred over to a locked-in type of RIF, usually it simply changes ownership to the surviving partner.

Check though! Always dig out the paperwork and read it. You don’t need to have to figure this stuff out at the same time that you are reeling from the shocking loss of your partner.

Can You Depend on Your DC Pension?

It appears that many DC pensions are at least as safe, or actually safer, if a company goes bankrupt than most DB pensions. Since most DC pensions are held by a third party in trust they are out of the reach of creditors and of desperate executives trying to keep a company afloat by “borrowing the surplus” from pension accounts.

What Will Happen to Your Personal Retirement Income When One Partner Dies?

In the second section, we’ll look at what may happen to other sources of retirement income such as RRSPs, RRIFs, TFSAs, and annuities if one partner dies.

What Will Happen to Your Government Retirement Income When One Partner Dies?

In the third section, we’ll look at what may happen to other sources of retirement income such as the CPP, OAS and GIS if one partner dies.

Related Reading

• You Think You’re Fine for Retirement But What Happens If Your Partner Dies: Will You Still Have Enough Income? Part 2: Personal Savings (RRSP, RRIF, TFSA, Annuity) Retirement Income in Retirement
• You Think You’re Fine for Retirement But What Happens If Your Partner Dies: Will You Still Have Enough Income? Part 3: Government Income (OAS, GIS, CPP) In Retirement

Join In
Have you done the math and read the paperwork to find out what the retirement income will be for you and your partner together, and each of you alone in retirement? Was it a sobering, frightening exercise to look at the survivor’s plan? Please share your experiences with a comment.