Married couples looking to retire, or already in retirement, may be living comfortably on income from both spouses. Planning for the post-retirement years often involves reviewing what the income will be as a couple in retirement.
However, what will the financial situation be after one spouse (often the husband) passes away?
Sources of Income For The Couple
When both partners are living, there are likely to be a few sources of income. Naturally, one source will be Social Security which may consist of two payments each month, one for each spouse if both were working and contributed long enough to qualify for Social Security.
Another source may be pensions provided by former employers. While employers have moved away from pensions and toward 401(k) plans, there are still many retirees who worked during those years when a pension was still offered.
Another source, particularly for younger retirees, is the 401(k) or an IRA created by rolling over 401(k) money. The size of this nest egg depends upon the contributions by employee and employer and how the funds were invested over its lifetime. Again, couples where both worked where 401(k)’s were offered might have two IRAs – one for each of them.
Widowhood Brings Changes To Income
The financial situation will change fairly drastically in terms of income after one spouse passes away. The widow(er) will retain only the larger of the two Social Security incomes. If one spouse receives $2,500/month and the other receives $2,100/month, after one spouse passes, the remaining spouse will only receive $2,500/month – a 45% drop.
Likewise, if both are receiving a pension (such as a couple who were both school teachers), the deceased spouse’s pension will only be what the survivor’s benefits are. That may be a percentage such as 50% of the full amount, or even no benefit, depending upon choices made when selecting to receive the pension. Again, that may mean a loss of 25% or more of pension income.
One benefit of using an IRA as part of the retirement income is that when one spouse dies, their IRA funds can be rolled over into the remaining spouse’s IRA. If the amounts taken from each IRA was only the Required Minimum Distribution, then the combined fund amount will be dependent only on the age of the remaining spouse. If there was a significant difference in age between the two spouses, this could change the required minimum amount that the remaining spouse would get which might be higher or lower than the two-person combined amount.
Preparing For Widowhood
What can you do to prepare for that situation? First, the couple should identify what the new income amount will be. This is likely to be lower than what the couple is used to receiving. Could the remaining partner live on this lower figure, or has the lifestyle been based on only a two-person retirement?
Another possibility is that the remaining spouse increase the withdrawal of their IRA or other savings to make up for the lost pension and Social Security income. If that’s not possible, then it may be necessary to downsize expenses or find another source of income such as going back to work. If the couple has a financial advisor, have a meeting to review the financial retirement plan to see how it will change withdrawal rates for the retirement investments.
There will also be changes to the household tax situation. The tax code penalizes single filers compared with married couples, so expect to pay higher taxes the year after the death of the one partner.
Financial Planning Options
If the couple is not yet at retirement or able to apply for Social Security benefits, Kiplingers has several suggestions to plan for this eventual future.
To maximize Social Security in both situations, review the claiming strategies when applying including what age to start claiming this benefit. A financial advisor can often assist with the different options and determine a best strategy.
Pensions also usually have options on payouts, and may have a spousal option that reduces the initial amount, but leaves larger portion of that amount as a survivor pension. Reach out to your pension or HR contact if you have not started to take your pension to find out what the options are and how much the payments would be in each situation.
To reduce taxes on IRA withdrawals, consider rolling over portions of an IRA to a Roth IRA. Taxes will be owed on the amount converted, but once in the Roth IRA any withdrawals will be tax free. Roth IRAs are not subject to taxes, nor are there required minimum withdrawals each year. This can help with the tax bill of the single spouse as well as give more flexibility on withdrawal of those funds.
Having a good financial professional who is knowledgeable about Social Security, retirement funds, taxes and legacy planning can considerably reduce the stress of becoming a widow or widower.
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