Here are six simple ways to make sure your spouse is 'set'--in every respect.
By Christine Benz | 10-21-10 | 06:00 AM | Email Article

When a family friend passed away a few years ago, he left his younger wife "set" in the traditional sense of the word. She had more than enough money to maintain her lifestyle, travel often, and help her kids fund college for their children.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

In another important respect, however, this new widow wasn't in good shape at all. Her husband, a dedicated do-it-yourself investor, had crafted an elaborate financial plan that consisted strictly of individual stocks and individual municipal bonds. That was a fine, tax-efficient program--as long as he was alive. But because his spouse hadn't paid much--if any--attention to their financial affairs, she was utterly bewildered about how to manage those assets on an ongoing basis, including how to reinvest the proceeds from maturing bonds, where to go for cash when she needed it, and whom to turn to for help. Her husband had done so much right, but in the end failed to "widow-proof" the portfolio, in the words of one poster earlier this week.

Before I go too far down this road of widow-proofing, I'll clarify that it's not always the female spouse who has tuned out of the family's financial affairs (or who, in the first place, never tuned in). I've met many engaged female investors who are clearly the chief financial decision-makers in their families. I also know plenty of couples who, together, give a lot of thought to their investments. Sometimes "widower-proofing" is in order, and sometimes it's not necessary at all.

That said, plenty of people who pass away or become debilitated do leave their spouses with overly complicated financial plans, too little information, and no clear instructions about where to turn for help.

Below are some of the key ways to make sure that doesn't happen to your family. (Note to readers: I'd also love to hear any tips you have for addressing this issue. Feel free to use the Comment field below this article to weigh in.)

1. Start the Conversation
Even if your spouse is happily hands-off, it's important that he or she is looped in on the basics of your financial plan, including how much you have, your chief financial assets, and what type of withdrawal rate your portfolio can safely support. Creating a master directory, which I discuss below, and having an investment policy statement will provide a good blueprint for such a discussion. Alternatively, or in addition to having a money conversation with your spouse, share at least the basic information about your finances with your most financially literate (and trustworthy) child.

2. Simplify
The poster who mentioned widow-proofing used it in the context of all-in-one funds, the point being that these investments' simplicity would make investing more manageable should his spouse predecease him. I like the way he's thinking. Assuming a financial plan includes a well-thought-out asset allocation and reasonable intra-asset-class diversification, less is more in terms of the number of individual holdings. That's particularly true if you're concerned about your spouse's ability to manage the portfolio on his or her own.

Of course, multiple accounts with multiple providers may be inevitable in some households, but collapsing your overall number of accounts--and the holdings within them--is a good starting point on the road to portfolio simplification. All-in-one funds such as those in Morningstar's  conservative- and  moderate-allocation categories can make great linchpins for widow- and widower-proof portfolios.

And for those who'd like to maintain tighter control over their portfolios' asset allocations while also obtaining ample diversification, broad-market index funds and exchange-traded funds make a lot of sense. My recent series featured conservative, moderate, and aggressive ETF portfolios for retirees and pre-retirees, but they were arguably a bit too complicated for a widow- or widower-proof portfolio. An even more streamlined ETF mix might simply include  Vanguard Total Stock Market Index ,  Vanguard FTSE All-World ex-US , and  Vanguard Total Bond Market Index , as well as cash holdings, apportioned according to the couple's risk tolerance.

Securities mentioned in this article



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Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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