Retirement Planning for Widows and Widowers

Retirement Planning for Widows and Widowers

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.

Download 9 Mistakes to Avoid When Retiring Solo for more retirement guidance.

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.

Tax Considerations

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 specifically for widows, called Qualifying
Widow. This allows a surviving spouse to be taxed at Married Filing Joint rates for the 2 years
after the year your spouse died. There may be strategies, such as a Roth conversion, that can
be taken advantage of during this 2 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.

Retirement Accounts

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 factors. 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.

Insurance Implications

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 policy. 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.

What to Know About Social Security

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 survivors 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. You can read about the specific rules here.


Download 9 Mistakes to Avoid When Retiring Solo for more retirement guidance.


This article originally appeared here.

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