Financial Planning Considerations After the Loss of a Spouse

Mourning the loss of a spouse can be one of the most difficult things for a person to experience.  In fact, Psychologists Holmes & Rahe developed a scale to assess the impact of life events on stress and the loss of a spouse was noted as the number one stressor.  The emotional aspects of grief can be challenging enough without having the worry that comes from being unprepared financially.  While no one is ever ready to lose a loved one, proper planning in advance of a loss may help ensure that finances may be one less concern during such a trying time.

When a spouse passes away, there can be many impacts to the financial picture.  From changes in income and estate planning to handling IRA and insurance distributions, there are many factors to consider.  The first step is understanding and quantifying the financial changes that may occur.

Changes in Income

A decline in income is often an unforeseen reality for many surviving spouses – especially for social security benefits.  For retirees without dependents that have reached normal retirement age, the surviving spouse generally receives the greater of their social security or their deceased spouse’s benefits – but not both.  For example, let’s assume John and Jane are receiving $2,000 and $1,500 per month in Social Security benefits respectively.  In the event John pass away, Jane will no longer receive her benefit and will only receive John’s $2,000 benefit – a 42 percent reduction in total social security income received.

While Social Security benefits typically begin at 62, a widow’s benefit can be available at age 60 for the survivor. (Age 50 if the survivor is disabled within seven years of the spouse’s death).  Additionally, unmarried children under 18 (up to age 19 if attending elementary or secondary school full time) of a worker who passes away may also be eligible to receive Social Security survivor benefits. Besides the worker's natural children, stepchildren, grandchildren or adopted children may also be eligible to receive benefits under certain circumstances.

Pension benefits are yet another form of income that may be reduced due to the death of a spouse.  Too often, those eligible to receive a pension elect little or no survivorship benefits resulting in a sudden drop in income.  For example, a single life annuity pension payment will end at the worker’s death leaving the survivor with no additional benefits.  Alternatively, a 50 percent survivor option will pay 50 percent of the worker’s benefit to the surviving spouse at their death.  While 50 percent is certainly better than no survivor option, the reduction can still result in changes in the survivor’s lifestyle.  It is important for the surviving spouse to understand what, if any pension benefits will continue and the financial impact of these changes.

How to handle spousal IRA benefits

In addition to changes in income, it is important for spouses to understand their options when addressing inherited retirement accounts.  The first option is for the spousal beneficiary to roll the funds to their own IRA account.  This will allow the beneficiary to delay Required Minimum Distributions (RMDs) until they reach age 72.  In this case, the beneficiary’s life expectancy is used to calculate future RMDs.  While this approach may be appropriate for those over age 59 1/2, spousal beneficiaries under the age of 59 ½ that require retirement account distributions may subject themselves to early withdrawal penalties. Remember, pre-mature distributions from a traditional IRA (before age 59 ½) will be taxable and subject to a 10% early withdrawal penalty, even if you inherited the funds.

Spouses younger than 59 ½ may want to consider rolling the account to a beneficial or inherited IRA as it may provide additional flexibility.  In this case, RMDs will be taken annually based upon the life expectancy of the beneficiary with distributions avoiding the 10% penalty.  Additionally, distributions greater than the RMD may be taken while still avoiding early withdrawal penalties.  Inherited IRAs can be a fantastic tool for spousal beneficiaries that need income today to help support their lifestyle but haven’t reached age 59 ½ yet.

Updating the survivor’s estate plan

Many survivors forget to re-visit the original estate plan that was drafted before their spouse passed away.  Are there different provisions that need to be made for children and grandchildren?  Do beneficiary designations on savings accounts, retirement accounts and life insurance policies reflect the survivor’s current wishes?  Are there any provisions that should be made to address gifting?  After taking some time to reflect, it is important for the surviving spouse to meet with their estate planning attorney to ensure that their will, power of attorney, living will and trusts meet their current needs.

Update the financial planning projections

While it is often recommended to avoid making any major decisions after the loss of a loved one, it is still critical to review the numbers.  How will changes in income, expenses, life insurance proceeds, estate plans and IRA distributions impact the surviving spouse’s ability to maintain their lifestyle?  Are they on a sustainable path to address their individual needs?  Creating a new financial plan may help provide clarity in these areas.  Since everyone’s situation is unique, consider speaking to your legal and financial adviser to determine the most appropriate strategy for you.

Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNERtm & Wealth Advisor.  He can be reached for questions at 732-280-7550, & LPL Financial Member FINRA/SIPC.