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Estate Shrinkage at Retirement

Retirement can be (and should be) an exciting event. After years of saving and hard work it is good to know that we can retire comfortably and with an enjoyable lifestyle.  And after all that hard work and prudent financial management we should be able to enjoy productive and rewarding ‘golden years’.

Proper retirement planning will ensure all contingencies are covered to ensure a secure lifetime income-income needs, lifestyle, inflation, health and long term care needs and guaranteed lifetime income.

But one item which is often overlooked is the Estate Shrinkage that may take place at the time of retirement.  Let’s take a 65 year old retiring after many long years of service with his employer. He is a member of a defined contribution (money purchase) pension plan and has Group Life Insurance for, say, $200,000.

So using today’s annuity rates let’s assume our new retiree has enough in the pension plan (about $495,000) to provide himself with an annual pension of about $32,000 (plus his CPP and OAS and any other income he may have). But he is married so at least 60% of the pension income must continue to his wife for her lifetime should he die first. There are other options available but let’s assume they elect the 60% survivor benefit. The initial income level would be about $28,000 (a reduction of about 12.5%) and should our retiree die before his wife her income would then become about $16,800.

So what happens to Estate Values if our retiree dies one day before retirement compared to dying one day after retirement?

The day before retirement the value in his Money Purchase Plan would be about $495,000 and his Group Life Insurance benefit would be $200,000.  So the total estate value from these sources would be about $695,000.

In most Group Insurance Plans the Group Life Insurance terminates at retirement. So our retiree would no longer be insured for this $200,000 Group Insurance after retirement. And while it would have taken about $495,000 to purchase the original pension the amount that would have been needed to simply purchase the 60% pension continuation for the widow would have only been about $286,000.

So the total Estate Value the day after retirement is about $286,000 which is over $400,000 less that dying one day before retirement! That’s Estate Shrinkage!

How do you protect against this? Proper long term planning would include a personal retirement savings program in addition to the pension plan that would ensure a lifetime income at the desired level for both the retiree and his wife.  And permanent low cost life insurance (preferably purchased when the retiree was much younger so the cost is low) will help to replace any lost estate value and help to maximize retirement income and security for both husband and wife.


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