Financial Planning for Widows

Written By: Kevin Reardon, CFP®

The fairytale begins with two young people falling in love and getting married. Children follow soon after and life is wonderful. You work hard and build a life together. Seasons come and go, children grow up and get married and life marches on. All the while, you are planning for the golden years when you will walk side-by side into the sunset. Some couples will reach that mythical finish line and begin this new chapter of life, while others will lose their partner before the race is done. In either instance, virtually all married couples will die separately, frequently with years or decades separating their deaths. What is life like for the surviving partner from a financial planning perspective? Let’s take a look:

Income

Wages: If your spouse was still working, you could see a significant drop in income when they pass.

Social Security: It should be of no surprise that when one spouse dies, their will be less income flowing into the family unit. In the instance of Social Security for married couples, the higher of the two benefits will continue, with the smaller benefit stopping when either spouse dies.

Pensions and Annuities: If you have a pension or annuity, you typically elect a specific income stream at retirement. One option is to have 100% of your income continue for the length of your joint lives (100% Joint & Survivor). The other extreme is to have the income stream stop at the death of the annuitant (Single Life). There are other options that fit somewhere in the middle. Which option you choose can dramatically impact the survivor.

Passive Income: Upon death, investment portfolios and retirement accounts frequently are transferred to the survivor and the income from those portfolios continue. Note: If this is your second marriage and you have certain assets going to a non-spouse upon your death (i.e. children from a first marriage), you will want to make sure your surviving spouse will not be negatively impacted.

Expenses

Your living expenses will change when your spouse passes away. In certain instances, you will see increased costs if you need to hire someone to handle tasks that your spouse used to do, such as cut the grass, shovel the driveway, cook and clean, maintain the house, etc. In other instances, you will experience a reduction in expenses in areas such as entertainment, food, healthcare, travel, auto maintenance (one car not two) and more. In general, we tend to see a reduction of living expenses between 10-30% for the survivor.

Taxes

The year after death, talk with your tax consultant to discuss your options. In the future, you will likely file as a single taxpayer moving forward versus filing a joint tax return when you were married. As a result, the standard deduction is cut in half and your tax brackets are compressed. It is not uncommon for surviving spouses to have higher tax liability when they are single vs when they were married. If your spouse is terminally ill and you wanted to gauge your future tax liability when you are widowed, consult with your tax professional who can run this ‘What if’ scenario.

Remarriage or Cohabitation

Although this topic is deserving of its own article, the financial considerations if you remarry or cohabitate frequently work opposite the scenario described above when you were widowed. From an income perspective, the new family unit should have higher income when they join, and sometimes higher than your first marriage. From a tax perspective, presuming the new couple remarries, it’s possible one spouse receives a lower overall tax liability once they are remarried, with the other spouse possibly being shifted into a higher tax bracket relative to when they were single. Keep in mind the tax situation of your second marriage could be different than your first marriage, depending on the income of your new spouse. Interestingly, the new family unit tends to experience an overall reduction in expenses as you consolidate from two homes to one and reduce other duplicative expenses that existed when you were both single.

Note: Frequently we see one party move into the other’s house, but the house stays in the name of the original owner. If the homeowner subsequently dies first, it is possible the survivor will be rendered homeless if you have not addressed this issue through prudent estate planning.

For further discussion, please reach out to your Shakespeare team of advisors. We are here to talk through these ‘What If’ scenarios and guide you and your spouse through these seemingly uncomfortable topics. Being prepared for the many situations life can bring will give you the greatest peace of mind.