Couples: Early Death and Retirement Planning

By Justin Pritchard, CFP®

Couples planning for retirement have several advantages over singles. For instance, there may be multiple streams of income from pensions or Social Security coming into the household. Plus, they may have more assets if both people bring retirement savings into the picture.

But there are also unique pitfalls that couples need to address. When ignoring those topics, a household may go into retirement unaware of risks that can leave one person in a difficult position.

One of the biggest risks—that often catches couples by surprise—is accounting for an early death. The results may include:

  • Loss of resources at early death
  • Complicated finances for a survivor
  • “Widow’s Tax Trap” (Medicare, income tax, and more)

These issues come up for both married and unmarried couples, and clients are often surprised as they explore the impact of an early death.

Continue reading below, or get similar information from this video.

What if One Dies Early?

Making a retirement plan often involves estimating how much you can spend with the resources available. For most couples, that means reviewing Social Security benefits for each person, pension income, assets, taxation, and more.

The default assumption on most software tools is that both of you will live to a reasonably late age. For instance, you might plan to live into your 90s.

Isn’t It Smart to Plan for a Long Life?

Projecting a long lifespan is smart if you want to be conservative about how long your assets will last. You can account for longevity risk, and a longer plan is typically more challenging (requiring more assets, better returns, or lower spending levels, for example).

But assuming a long life is problematic when it comes to figuring out how your income sources contribute to your comfort in retirement.

Unfortunately, most people stop at assuming they’ll live a long time. But it’s critical to run what-if scenarios where each of you dies at different ages. Unfortunately, expenses don’t get cut in half for a surviving spouse. Grocery bills might shrink somewhat, and you’ll buy one less ticket for every trip you take, but many household expenses remain the same.

Does Income Stop?

Some sources of retirement income continue. But Social Security, which makes up a significant portion of most peoples’ income in retirement, typically shrinks when one of you dies. Yes, a surviving spouse gets to take over the biggest payment, but the household’s income might still drop dramatically.

If you lose a few thousand dollars of monthly income each month, will it be a problem?

Pensions are also important, but sometimes the consequences aren’t as severe. Some pensions offer survivor benefits providing the surviving spouse with 100%, 50%, or some other amount of the monthly income after death. That’s often helpful, and those survivor benefits are often worth looking at when you decide which option to take at retirement.

How to Find Problems

To figure out if your household is at risk, try several different what-if scenarios with retirement planning software, or ask you financial planner to do so. For instance, let’s say you plan to retire at age 62. Try the following scenarios:

  • You die at 63, spouse lives into their 90s
  • Your spouse dies at 63, you live into your 90s
  • You die at 70
  • Your spouse dies at 70
  • You die at 80
  • Spouse dies at 80
  • And so on

As you experiment with each of those scenarios, you may be able to identify problem areas. You might find that things look pretty good if both of you make it until 70 (or some other age), for example. The important thing is to understand what ages are important and where the survivor stands at crucial ages.

If you find problem areas, there may be several ways to deal with the issue. Potential solutions include:

  • Changing your retirement date (by retiring later, typically)
  • Maximizing Social Security benefits by having at least one person delay benefits
  • Evaluating inexpensive life insurance (like a 10- or 20-year term policy)
  • Choosing pension options that include a survivor benefit
  • Exploring other ways to help the survivor

You can get creative and envision how the future might unfold. For example, if you own your home, you might have significant equity in the property. The surviving spouse might not want to remain in the home for several reasons after the other person dies. For example, the property might be bigger than one person needs, or the survivor might just want to live somewhere else that doesn’t have the same memories. By downsizing or relocating, that person might get all the assets they need to continue living comfortably.

Complicated Finances

Financial management is another challenge for surviving spouses.

In some couples, there’s one person who’s interested (if not enthusiastic) about personal finance. That person might read books, watch endless videos, build gargantuan spreadsheets, and spend numerous hours reviewing and optimizing the household’s finances. Those activities might include tracking spending, making frequent changes to save money or earn a bit more in interest, managing investments, and more. There might even be active trading strategies that require constant attention and maintenance.

If the other person is relatively uninvolved (often they’re just interested in other things), what happens when the “financial manager” dies first?

It depends. With foresight and preparation, the finances might be relatively simple. Accounts might be in a handful of places, and the investment strategy might be easy to get a grasp on. That’s the ideal situation.

But all too often, the financial manager treats financial matters as a full-time hobby. If they’re trading stocks and using other complicated strategies, the survivor can be left with a mess. And it might be important to take action quickly if there were “bets” out there that need to be unwound.

How to Avoid Problems

If you’re the financial person, it’s wise to plan for your eventual death or incapacity. Unfortunately, it could even happen sooner than you think. To make things easier for a survivor, it may make sense to use relatively simple strategies. Alternatively, you might want to provide names of trusted financial advisors who can help your spouse in case something happens. Either way, it’s often a good idea to at least share details with your spouse periodically so they have a high-level understanding of what’s going on.

An “in case of emergency” folder can also help. That’s a digital or physical place to store essential information such as a list of accounts, tips for managing things, and more.

If you’re the “non-financial” person, it may make sense to start nudging your spouse. Ask questions and learn what’s going on. If things seem complicated to you, feel free to say so, and ask what you’re supposed to do if something happens to your spouse. This might be the first time they thought about this, and the discussion might move things toward simpler arrangements.

The Widow’s Tax Trap

A third situation to be aware of is the so-called “widow’s tax trap.” When one person in a married couple dies, the survivor spends their remaining years in a single tax-filing bracket.

Several issues can arise when that happens:

  • The same level of income causes the survivor to pay taxes at higher rates.
  • A high income may lead to higher costs for health coverage (IRMAA surcharges, for example).
  • All of the pre-tax assets go into the survivor’s name, and they’ll need to take required minimum distributions (RMDs) that can get quite large.

You may face other complications.

How to Reduce Problems

Review your finances and run projections to see how things might unfold for your household. If it looks like a surviving spouse will see significant financial consequences (on top of the emotional impact), explore some solutions.

One option is to convert pre-tax assets to Roth assets. By doing so, you reduce the size of pre-tax holdings, which should reduce future withdrawals. However, you’ll need to pay taxes to convert, which affects your income (and possibly other areas of your finances) in the near-term. So, you’ll need to carefully analyze whether or not it makes sense to pursue this strategy. If it looks like a good idea, you’ll need to decide on appropriate amounts to convert.

Another potential solution is to spend down pre-tax accounts instead of letting them grow as long as possible. In the past, the conventional wisdom was to put off paying taxes for as long as possible. Some tax preparers suggest that you avoid adding to your tax liability until it’s absolutely necessary. Unfortunately, you might miss opportunities to take income in tax-favored ways.

Consider taking out enough income each year to put yourself into an acceptable tax bracket. Keep an eye on healthcare costs as well, as your income can potentially affect premiums and more. And it’s also wise to see if your income strategy affects how much of your Social Security benefit will be taxable.

You might also have opportunities to manage pre-tax distributions with charitable giving strategies like QCDs. Ultimately, it’s wise to survey all of the opportunities and risks, and you might be able to improve things for a survivor.