Retirement planning for widows (and widowers) involves some unique aspects that must be considered in addition to the emotional grief and stress that comes with losing a spouse.
There seems to be some correlation between times of intense stress and bad decisions. Making financial decisions while grieving is no different. Making matters worse, many financial decisions can be irreversible, and unscrupulous financial reps can use the stress and uncertainty to push certain products.
While these implications are important to know, it is not a complete list. None of this should be construed as specific advice because everyone’s situation can be different and have extenuating circumstances.
Some people may experience a “widow penalty.” This is more common when a couple has a large pre-tax investment account like a 401k or IRA. If the income remains similar for the surviving spouse, then the single filing status means you will likely be taxed at a higher rate on that income.
For this reason, the IRS has created a filing status called Qualifying Widow. This special status allows a widow to be taxed at Married Filing Joint rates for the first two years following the death of her spouse. There may be strategies, such as a Roth conversion, that can be taken advantage of during this two-year period.
Additionally, you may be more likely to owe higher Medicare premiums in the form of Income-Related Monthly Adjustment Amount (IRMAA) surcharges. If your income goes above certain thresholds, your Medicare Part B and D premiums will increase.
It is possible you were not subject to these higher Medicare costs before your spouse died, but your income may subject you to these surcharges now since the income threshold is lower for a single taxpayer.
As a spousal beneficiary of a retirement account, you have the option of treating your deceased spouse’s account as your own or treating yourself as the beneficiary. The correct decision depends on many factors, but age and income needs remain two of the primary ones.
You should consult a qualified advisor to help you determine the best decision for you because this may be one of the “irreversible decisions” mentioned earlier.
If you are under 59.5, you cannot access your IRA without a 10% penalty unless an exemption applies. You may choose to treat yourself as the beneficiary in this situation because that would allow you to access the account without penalty. Spousal beneficiaries can always roll it over to their own IRA at a future time.
If you are over 59.5, don’t need income, or are younger than your spouse, it can make sense to roll it to your own IRA because the Required Minimum Distributions (RMD) either wouldn’t be required or they would be lower.
However, if you are older than your spouse, it can make sense to treat yourself as the beneficiary even if you are over 59.5 and need income because the RMD could be lower.
Your insurance needs may not be the same as when you were married. Life insurance on yourself may no longer be necessary, although it may make sense to keep, depending on your legacy goals.
Your decision must also take into consideration whether your life insurance is a term policy or a permanent one. For example, a whole-life policy has different dividend and non-forfeiture options that give you flexibility beyond just cancelling the policy.
Long-term care insurance is often purchased to protect the surviving spouse because a nest egg can be spent down fairly quickly if long-term care is needed. That may no longer be a relevant objective, although you may still want to protect your assets so there is more to leave your heirs.
Surviving spouses have some unique options when it comes to claiming Social Security. For example, you have the option to receive reduced benefits as early as 60.
However, these benefits would be permanently reduced so you will want to carefully consider whether or not it makes sense to claim early. Generally speaking, the healthier you are, the longer you should wait to claim.
If your own benefit is higher than the survivor benefit, you may be able to claim a survivor benefit for a period of time and then switch to your own benefit later.
Caring for a child or having a disability could allow you to claim even earlier. Also, you won’t be eligible for a survivor benefit if you remarry before 60.
The most important thing to remember about Social Security is that you must know all the options available to you.
Have you had to make difficult financial decisions in times of grief? What were the results? Would you reconsider some of them if you had the option? Please share with our community and let’s have a discussion.