By Neal Templin
You've done everything to prepare for a financially secure
retirement as a couple except one thing: What will the financial
picture look like after one of you dies?
A lack of preparation can imperil the finances of the surviving
spouse.
Consider how much income may be lost. If you're collecting two
Social Security checks in retirement, the smaller one effectively
goes away after the first spouse dies. If one of you has a pension
without survivorship rights, that, too, expires when you do.
Even though the income of the surviving spouse is usually lower,
he or she is often hit with a higher tax bill. That is because the
survivor will be filing as a single person instead of married
filing jointly. High tax brackets kick in at lower income levels
for single people.
"When that plan is disrupted by the tragic death of a spouse,
there isn't a lot you can do besides cut expenses or go back to
work," says Jennifer Murray, a financial adviser in Morristown,
N.J., many of whose clients are widows.
How to prepare
The good news is there are things you can do to help prepare
financially for the death of a spouse while you're both alive.
These include delaying Social Security for one spouse to make the
survivor's check as big as possible. Another key is doing Roth
conversions or spending down tax-deferred accounts to reduce the
mandated withdrawals -- known as required minimum distributions, or
RMDs -- that will force the survivor into high tax brackets.
As for pensions, when employees are offered pensions they
usually have a choice between those with or without survivorship
benefits for their spouses. The responsible thing is usually to
choose survivorship rights, even though the payout will be
lower.
"I hear all the time, 'Let me take the bigger pension and call
it a day, and if I die, it's my wife's problem,'" says David
Frisch, a certified public accountant and financial planner in
Melville, N.Y.
Many people underestimate the likelihood of spending many years
as a widow or widower. Women on average live two to three years
longer than men. But when it comes to couples, most spouses die
more than a few years apart.
Two economists studied the life expectancies for a husband and
wife when a 62-year-old man is married to a 60-year-old woman.
Wives who survived their husbands (a 62% probability) lived 12 to
14 years on average before dying. Men who survived their wives (a
38% probability) lived nine to 11 years.
"The chance that you'll be widowed for 20 years is not
insignificant," says Janice Compton of the University of Manitoba,
a co-author of the study. "There is a huge range [of possibilities]
that makes it difficult to plan. If your plan is based on your
projected life expectancy, there is a good chance you'll run out of
money."
One couple's mistake
Jared Hoole, president of Lakeside Financial Planning in
suburban Boston, advised a newly retired couple that was living off
two Social Security checks, investments and rental income from a
property owned jointly by the wife and her mother, who was in her
90s and in poor health. The wife assumed she would outlive her
mother and inherit the property.
Mr. Hoole says he suggested that the couple review their estate
plan to make sure -- among other things -- that their properties
were properly titled, but the couple didn't see it as a
priority.
When the wife died from a sudden illness at age 63, her Social
Security checks stopped. But so did the income from the property,
which was now owned entirely by the mother.
While the couple, who had no children, previously had income of
$100,000, the man now had income of $72,000, which wasn't enough to
remain living in their house. The husband ended up selling it and
moving to Tennessee, where the cost of living is lower.
Some surviving spouses have the opposite problem: too much
money. Natalie Pine, a financial planner in College Station, Texas,
represents a 67-year-old widow who inherited a $7 million
tax-deferred account three years ago when her husband, an energy
company executive, died unexpectedly at age 70.
If the widow did nothing, Ms. Pine calculated, she would have to
take $280,000 in required minimum distributions from the
tax-deferred account beginning at age 72. As a single person, this
would have forced her into almost the top tax bracket.
Instead, the widow is making large Roth conversions each year to
reduce the balance in her tax-deferred account before RMDs
begin.
In a Roth conversion, you move investments from a pretax account
to an after-tax Roth account. The amount converted is taxed as
ordinary income, so it makes sense to do conversions when you are
in a lower tax bracket. Many retirees are in a relatively low
bracket in their mid- and late 60s, before they start drawing
Social Security and making RMDs.
In addition to the Roth conversion, the widow will begin making
qualified charitable distributions from her tax-deferred account at
the minimum age of 70 1/2 , Ms. Pine says. You can donate up to
$100,000 a year this way and it counts as part of your RMD.
When a spouse dies, the survivor might not be focused
immediately on the financial picture. "Most people are not thinking
about this, and if you don't have proper planning it is kind of a
punch in the gut," says Marienela Collado, a certified public
accountant and financial adviser in Plantation, Fla.
But there are some important money-saving maneuvers that can
only be done the year of the spouse's death, Ms. Collado says. When
somebody dies, any capital losses they have accumulated on
investments expire, too.
Spouses have the right to use these capital losses to offset
gains in the year of their spouse's death, Ms. Collado says.
Suppose a widow has a $200,000 gain in her Facebook stock, and her
late husband had generated a $200,000 capital loss. She can sell
the Facebook stock to generate a gain, and buy it back 10 minutes
later if she still likes Facebook. When she eventually sells the
stock down the road, she will have avoided capital-gains taxes on
$200,000.
One caveat: It has to be in the same calendar year. "If somebody
dies on Dec. 25, you have five days" to use the loss carry-over,
Ms. Collado says.
Impact for years
The financial toll of a spouse's death often isn't clear for
years. Medicare bases your monthly premium on your modified income
two years earlier. Whereas a couple can have up to $176,00 a year
in income and still each pay the minimum premium of $148.50 a
month, the limit for singles is $88,000.
Ms. Murray, the New Jersey financial adviser, has an 85-year-old
client who lost her husband in 2018. Her first tax return as a
single person was in 2019.
In January of this year, the widow noticed that the Social
Security Administration, which also runs Medicare, had reduced her
monthly check. It turned out her Medicare premium had doubled
because she was now filing as a single with lower income
brackets.
The widow's Medicare premium will drop back in 2022, based on
her lower 2020 income. As part of the pandemic relief legislation,
Congress allowed retirees to hold off on taking RMDs from
tax-deferred accounts for a year. That was enough to push the
widow's income under the Medicare limit for a year. But the RMDs
are back this year, and the widow's Medicare premiums are headed
back up in 2023.
Mr. Templin is a former reporter and editor for The Wall Street
Journal who lives in New Jersey. He can be reached at
reports@wsj.com.
(END) Dow Jones Newswires
June 03, 2021 12:22 ET (16:22 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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