How to Prepare Financially for the Death of a Spouse

You and your spouse have done everything right financially. Except you didn’t consider the impact when one of you dies first.

Preparing for the financial aftermath of a spouse’s death is crucial. Even with diligent retirement planning, the financial landscape can drastically change when one partner passes away. Here’s how you can prepare for such an eventuality.

Understanding the Financial Impact

Losing a spouse can severely affect the surviving partner’s financial situation. Social Security benefits will be reduced as the smaller of the two checks disappears. If a pension without survivorship rights exists, that income stream will also cease.

Despite the drop in income, the surviving spouse may face higher taxes due to filing as a single person. Higher tax brackets apply at lower income levels for singles, compounding the financial strain.

When the plan is disrupted by the tragic death of a spouse, there isn’t much you can do besides cut expenses or return to work.

Proactive Financial Steps

There are several steps you can take to mitigate financial hardships after a spouse’s death:

1. Maximize Social Security Benefits: Delay Social Security for one spouse to increase the survivor’s benefits.
2. Roth Conversions: Convert tax-deferred accounts to Roth IRAs to reduce required minimum distributions (RMDs) and avoid higher tax brackets for the survivor.
3. Survivorship Benefits: Opt for pension plans with survivorship benefits, even if it means a lower payout initially.

Longevity Considerations

Women generally outlive men by two to three years, but the gap can be much more significant for couples. Economists’ research found that 62% of wives will outlive their husbands by 12 to 14 years on average, while 38% of husbands who outlive their wives do so by nine to 11 years. Planning based on projected life expectancy can lead to financial shortfalls.

Managing Wealth and Taxes

Some surviving spouses face the opposite problem: too much money. We recently helped a 64-year-old widow with a $4 million tax-deferred account avoid high tax brackets by doing laddered annual Roth conversions for the next six years, then shifting to qualified charitable distributions.

Timing and Tax Strategies

Grief can make it feel like time is standing still, but we can’t overstate the importance of timing in financial maneuvers. For instance, surviving spouses can use their partner’s capital losses to offset gains, but this must be done within the same calendar year of the spouse’s death.

Long-Term Financial Implications

The financial impact of a spouse’s death can extend for years. Medicare premiums, based on modified income from two years prior, can increase significantly for singles. For example, in 2024, a couple can have up to $196,000 in income and still pay the minimum premium, but for singles, the threshold is $98,000.

Conclusion

Preparing for the financial impact of the death of a spouse is difficult, but essential. At Hill Island Financial, we go beyond standard planning to create a tailored approach that protects your financial future in times of transition. Our advisors help you address single-taxation burdens, optimize Social Security, and set up strategies like Roth conversions and pension adjustments to keep you secure.

Let us help you build a resilient plan that honors your legacy—contact Hill Island Financial today.