Plan Now for Retirement as a Surviving Spouse
By David Brooks, Founder & President of Retire SMART
There is a growing number of single women – widowed, divorced, or never married – who find themselves confronted with unfamiliar and uncomfortable financial decisions as they approach and experience retirement.
There are a variety of reasons why they find themselves in this predicament. In marriage, the husband may have been the partner earning income and managing the finances. However, even single women (and single and married men) who have been financially active and savvy their entire lives may not be adequately prepared for retirement.
The focus here, though, is planning for the surviving spouse, who most often is the wife. The younger spouse usually is the female, and females tend to live longer than males. MarketWatch is among numerous financial news organizations that have cited a statistic from the Women’s Institute for a Secure Retirement: 80% of men will die married; 80% of women will die single.
This presents issues that must be addressed. There is power in planning, but it must be done before the surviving spouse finds herself beset with problems that it’s too late to fix.
If the wife was the primary caregiver of the children, her Social Security benefit may be smaller than her husband’s because she did not earn as much in the working world. Therefore, make sure that as a widow she is receiving her husband’s Social Security payment. But also factor in the budgetary reality that her Social Security payment will go away.
If the husband had a pension, was it set up to provide a survivor benefit for the wife? Generally, it involves taking less of a pension benefit while the husband is living, but it must be specified upfront.
Has the likelihood of higher and unexpected health care costs been factored into the retirement plan?
Has the estate plan been updated, especially the list of beneficiaries?
Is there a business, a rental property, a farm, or some other asset that should be sold because the surviving spouse is not interested in managing it? There are ways to cash out assets that minimize the tax bite to the surviving spouse, but they must be identified and executed at the right time.
Speaking of tax bite, perhaps the most devasting blow to a surviving spouse comes the first time she submits a tax return as a single filer. Single filers move into higher tax brackets at lower levels of income than married filers. The income level may be the same, or more likely will be reduced, but the tax required may be much higher. Even though the surviving spouse’s income is the same or lower than it was while her husband was alive, she may well find that her status as a single filer moved her from the 12% federal income tax bracket to 22%. It seems unbelievable, but it happens all the time: Uncle Sam demands more tax dollars from the surviving spouse than he did from the married couple, even though the surviving spouse’s income has decreased.
There are strategies to avoid this kind of tax shock, but they must be implemented before the triggering event happens. A devoted wife, mother, and grandmother should not be blindsided as a surviving spouse by some of the financial realities of retirement as a widow. No grandmas left behind! With the right planning, a surviving spouse can avoid the bumpy patches and chart a smooth track for a financially secure retirement.
