Protect Each Other: Make a Financial Plan for a Spouse’s Death in Retirement

It’s not a pleasant consideration when creating a retirement plan, but it’s a necessary one: What will the financial reality be for the surviving spouse after the death of their partner in retirement? For instance, as a couple, you enjoyed two Social Security incomes. Now you or your spouse will have to contend with just one.

That’s just one example, but it emphasizes the need for a retirement plan that prepares for the passing of a spouse. Whether you are working with a financial advisor or managing your own retirement plan, here are some areas to consider when preparing for the death of a spouse in retirement:

Beneficiary Designations

If you have joint real estate or bank or investment accounts, you have little cause for concern. Generally, these assets will pass smoothly to the surviving spouse. But individually held assets are another matter. Those accounts will pass to the beneficiary on record—including ex-spouses!

It is important to review your beneficiary designations annually or after significant life changes to help ensure the account’s balance will go to the right person after you die. Consider talking with a financial advisor to determine how you and your spouse should designate certain accounts to help maximize retirement income for the surviving partner while leaving an inheritance for other loved ones, such as children and grandchildren.

IRAs

Leaving an IRA to a spouse (as opposed to other family members) can be a good idea, given recent rules affecting distributions. Most people now have to empty an inherited IRA within 10 years, which can affect their tax bracket.

But a widow or widower is exempt from the new rule and can make withdrawals over their lifetime. Plus, their required minimum distributions (RMDs) will be based on their deceased spouse’s age rather than the survivor’s unless they submit a new schedule. This provides some income flexibility for the widow or widower.

The surviving spouse can also roll over the account to their own IRA, convert it to a Roth IRA, or cash it out. Each of these options can have a tax impact, so it’s a good idea to speak to a financial advisor or tax professional before deciding.

Social Security Benefits

We already covered that once a spouse dies, the survivor will have less Social Security income to rely on. The good news is that the Social Security Administration awards survivor benefits. This means that the widow or widower will receive the larger of the two benefit amounts they were receiving as a couple. They may also be entitled to a one-time payment of $255.

Social Security survivor benefits are too complex a topic to be adequately covered in this short article. It’s important that you get a grasp on them before you start taking Social Security since the amount the surviving spouse receives may change based on when you enroll.

To understand what you or your spouse may receive if one dies before the other, read the Social Security Administration article “Survivors Benefit Amount.”

Estate Taxes

If you have a significant estate, consider working with an estate planning attorney and financial advisor to minimize the tax impact on the surviving spouse and other heirs. For 2022, the federal estate tax applies to assets worth $12.06 million or more.

You should also understand whether your state levies any estate or inheritance taxes so you can act to minimize them as much as possible.

Tax Brackets

Your planning should project the tax bracket you or your spouse would enter as a surviving spouse. It is much easier for single filers to climb into a higher tax rate at less income! And as their bracket rises, they may have to contend with taxable Social Security benefits and Medicare surcharges.

Proactive planning now could help reduce the tax impact through such strategies as Roth conversions and life insurance policies. Because this is a complicated subject, we generally recommend you assess your potential steps with the aid of a professional.

Pension Payouts

It’s tempting to take the life-only option if you have a pension. After all, it gives you a higher income than the survivorship option.

However, married couples should think through this choice carefully. Life-only benefits end with the death of the pension owner; the surviving spouse will get nothing. The survivorship option gives the surviving spouse a continued income stream and probably one less thing to worry about while they’re learning to manage on their own.

The Key Ingredient: Communicate Now

In many relationships, one person takes the lead in financial management. Although it’s good to play to each person’s strengths, we’ve seen too many surviving spouses feel clueless about their situation. They didn’t know their account balances or even where they were held. They didn’t have online passwords. They didn’t know where the will was.

This lack of knowledge makes a hard time even harder and can cause them to lose out on important income. It’s critical that both spouses know the key financial details in retirement. Make this knowledge part of the preparation process that helps the widow or widower stay on solid financial ground after the other spouse dies.

If you’re unsure how to achieve financial confidence for a surviving spouse, consider working with a financial advisor. Our retirement planning firm in Greenwood Village, CO, helps couples prepare for a spouse’s loss as part of their comprehensive financial plan.

We offer a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.

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