When Retirement Income Falls Off a Cliff!
Most couples spend years planning for retirement, but few take the time to consider what happens financially when one spouse passes away. Too many times, when one spouse dies, retirement income falls off a cliff. While many people assume retirement income will decline gradually, the reality is often much more dramatic. In many cases, household income can drop sharply overnight, creating serious challenges for the surviving spouse at an already difficult time.
One of the biggest surprises involves Social Security benefits. Many retirees incorrectly believe the surviving spouse will continue receiving both Social Security checks or at least a portion of each benefit. In reality, the surviving spouse generally keeps only the larger of the two benefits, while the smaller benefit disappears entirely. For example, a couple receiving a combined $4,400 per month from Social Security could suddenly see that income reduced to just $2,800. Pension income can also be affected. If a survivor benefit was not selected when pension payments began, those payments may be reduced significantly or even stop altogether.
Taxes can add another layer of difficulty. While a surviving spouse may still be able to file a joint tax return in the year of their spouse's passing, future tax returns are often filed under the single-filer status. Because single tax brackets are much narrower, many widows and widowers find themselves paying a higher tax rate despite having less household income. Financial professionals often refer to this as the "widow's penalty." At the same time, Required Minimum Distributions (RMDs) from retirement accounts generally continue based on the account balance, potentially increasing taxable income and even triggering higher Medicare premiums through the Income-Related Monthly Adjustment Amount (IRMAA).
The good news is that proactive planning can help reduce these risks. Reviewing pension and annuity survivor benefit elections before a health event occurs is critical, since options may become limited later. Couples should also carefully evaluate their Social Security claiming strategy, particularly for the higher-earning spouse, since that benefit is typically the one that survives. Tax planning strategies such as Roth conversions while filing jointly may help reduce future tax burdens and RMD exposure. Additionally, life insurance can be structured not simply to cover final expenses, but to replace lost income and help preserve the retirement lifestyle both spouses worked hard to build. While these conversations may be uncomfortable, planning for the unexpected is one of the most thoughtful and caring financial decisions a couple can make.
If retirement income following the death of a spouse is a concern and you want to learn more, attend our comprehensive retirement planning webinar. This easy to access, on-demand, no-cost, no-obligation webinar can help you identify the next steps you need to take to create a comprehensive plan for your retirement journey. Please click the link below to watch this insightful, on-demand financial education event.
Retirement planning isn't just about preparing for your best years, it's also about preparing for your toughest transitions. By understanding how Social Security, pensions, taxes, RMDs and survivor income may change after the loss of a spouse, you can take steps today to help protect the financial future of the one you love most. A strong retirement plan shouldn't leave the surviving spouse hanging by a thread. It should be built to weather life's storms and ensure that when the unexpected happens, retirement income doesn't fall off a cliff. Plan well. Live well. Retire well.
Will Riggs, NSSA
Financial Advisor
Plan well. Live well. Retire well.
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