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Investing Specialists

How to Widow-Proof (or Widower-Proof) Your Portfolio

Here are six simple ways to make sure your spouse is 'set'--in every respect.

Note: This article is part of Morningstar's October 2014 5 Keys to Retirement Investing special report. This article previously appeared Jan. 25, 2013.

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.

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.

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
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. I've created 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 ETF (VTI),  Vanguard FTSE All-World ex-US ETF (VEU), and
 Vanguard Total Bond Market ETF (BND), as well as cash holdings, apportioned according to the couple's risk tolerance.

3. Shape Up (and Share) Your Record-Keeping System
Even individuals who aren't doing anything fancy from a portfolio-management standpoint may fail to keep a good paper trail detailing their activity. They may manage their financial records in a way that makes sense to them but not an uninitiated outsider or fail to give their spouses adequate information about where to find what. Organizing files in broad, easy-to-understand categories (for example "Investments," "Insurance," and so on) is a good starting point, with subfiles for each account.

I'm also a big believer in creating a master directory, which can be either electronic or paper. In it, include financial assets such as bank, fund, and brokerage accounts; company-retirement plan and pension fund details; real estate holdings, and business interests. Alongside or beneath each account name, include account numbers, websites, passwords, key contacts, and phone numbers. Include similar details for debts you owe and insurance policies. Having such a document can be a good way to provide your spouse with a 3,000-foot view of your household's finances; just be sure to tell him/her where to find this document and keep it password-protected or under lock and key.

4. Provide Guidance on Where to Go for Cash
One of the key pieces of financial guidance for new widows and widowers is to make no financial decisions at all within the first year or so after a spouse's death. That's great advice, but it's a luxury that some surviving spouses can't afford because they don't have adequate cash reserves to fund their near-term living expenses. True, stashing too much of your portfolio in cash carries a steep opportunity cost right now, but every retiree household should aim to keep at least one year's worth of living expenses in true cash. It's also important to provide your spouse with guidance on which assets are most liquid and appropriate to tap in a pinch and which are less so.

5. Put It on Autopilot
I'm a big fan of putting as much of your investment plan on autopilot as possible, so your portfolio could run itself for a time if need be. A key benefit is that you'll be less tempted to override your carefully laid investment plan at an inopportune time, but another is ease of use. Investigate what options your investment provider has for automating your investment program. Switching on features such as automatic required minimum distributions is a good example of this idea.

6. Help Identify a Suitable Advisor
Many individuals with spouses who are disengaged financially take comfort in knowing that their spouse will be able to turn to an advisor after they're gone. What they don't think through is just how much you actually need to know to hire the right advisor. After all, the advisor landscape is a wild west of different designations and standards that are bewildering even to experienced investors. (Financial advisor and author Bill Bernstein once quipped that by the time you know enough to choose a good advisor, you don't need an advisor at all.)

Thus, if you think your spouse will eventually need to turn to an advisor, it doesn't hurt to begin the search for a qualified advisor while you're still around to help with the screening. Even if you don't plan to begin working with an advisor anytime soon, it's not too early to begin the vetting process by surveying friends and family for recommendations and conducting informational interviews. If an advisor won't spend some time with you--gratis--to discuss his or her business model and investment philosophy, that person doesn't deserve your time, either.

See More Articles by Christine Benz

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.