Retirement Planning After Losing a Spouse

Key Takeaways for Retirement After Losing a Spouse

• Take your time with large financial decisions.
• Prioritize liquidity.
• Take stock of options for inherited retirement accounts.
• Consider financial advice.
• Review your estate and long-term-care plans.

Susan Dziubinski: Hello, I’m Susan Dziubinski and welcome to Retirement Planning for Real Life. Losing a spouse changes more than your day-to-day life—it changes your financial picture, too. Today, we’ll walk through some of the most important retirement planning decisions for widows and widowers. I’m here with Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning. She’s also the author of How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.

Thanks for being here today, Christine.

Christine Benz: Susan, always great to see you.

Widowhood Statistics

Dziubinski: All right, Christine, let’s start with some data about widows and widowers in the US. What’s the average age that someone loses a spouse?

Benz: Age 59 is the average age at which someone loses a spouse, and it’s important to know that there are many more widows than widowers. So, it’s much more common for women to lose their partners than vice versa. There were 12 million widows recently in the US, 4 million widowers.

Economic Impact of Losing a Spouse

Dziubinski: Of course, the emotional impact of losing a partner is huge, but let’s talk about the economic impact of losing your spouse. You note that that often translates into diminished financial resources, particularly for women. What are the major reasons behind that?

Benz: The headline is that household living expenses tend to not change a lot whether there are one or two people in the house, but income often drops significantly after the loss of a spouse. So if someone had a pension, for example, without a survivor benefit, that can result in a significant loss of income for the household. Social Security also typically translates into a significant, meaningful loss of income for a household. And the key reason is that you’re allowed to have your own benefit or your partner’s benefit, but not both. That often leads to a significant decline in income for many households. And then another factor in the mix relates to taxes. So when someone becomes either a widow or widower, they will move from married filing jointly on their tax return to a single filer. And that’s often less beneficial from a tax standpoint.

Financial Decisions to Avoid After a Spouse’s Death

Dziubinski: You often hear advice to widows and widowers is to not make big decisions in general after losing your spouse. What are some of the ones from a financial perspective that you would recommend that people really sort of take a beat and hold off on after losing a spouse?

Benz: A few key ones. Amy Arnott and I recently had a conversation with a financial planner who specializes in planning for widows, in particular. And she made the point that a common one she sees is that people make big housing decisions right after losing a partner. And it seems reasonable that someone might sort of get bad vibes from the home that you shared together, that you may want to make a change on that front, but her point is, don’t be rash. Housing decisions are big, important, emotional, and financial decisions. Take a step back, maybe just get a short-term change in location while you think through your options.

So, that’s one. Another is the decision about whether you yourself should retire at the time you lose a partner. I think oftentimes people have the sense, “Well, life is fleeting. I want to embrace the life that I have.” And so it might be tempting to make a decision about retiring at the time you lose a partner, but many companies will grant you a really nice leave if you lose your spouse. Take advantage of that. Use some time to think about what your options are. You may find that actually your colleagues, the rhythm of work provides you some comfort. Obviously, it’s a big, important decision, but maybe don’t move into it too hastily. And then finally, from a pure financial standpoint, using your inherited IRA assets, cracking into your partner’s IRA, you may need to do that, but move with caution because even though that’s the largest pool of money in many households, there are the biggest tax implications with spending significantly from those traditional tax-deferred accounts. So, here’s a spot to get some advice.

Bringing in a New Financial Advisor After Losing a Spouse

Dziubinski: Speaking of advice, you also think that widows and widowers should be deliberate about bringing on new financial advisors at this point in time. Why is that?

Benz: Well, and you often hear this statistic, Susan, that a very large share of widows in particular seek out a new financial advisor upon losing a partner. The statistic is like 70%. In reality, it’s more like 13%, I was reading. So, big difference, but still that’s not insignificant. People do seek out new financial advisors. But the key is to not do it too quickly for a couple of reasons. One is that transitioning to a new advisor does require a lot of administrative work, which you may not want to be bogged down with at this point in time. And that onboard advisor, your current advisor, even though you may not be thrilled with him or her, they do have a lot of important information that can help you achieve the things that you need to get done right now. So, even though it might be on your long-term dashboard to make a change there, don’t do it right away, I wouldn’t think, unless there’s some extreme situation in place.

Benefits of Building Liquidity

Dziubinski: At the same time, you say that it is important to identify your liquid reserves. What are some of the sources of liquidity, and why is this one of the key benefits of having that liquidity?

Benz: Right. And this is a piece of advice to people who are watching who are the main financial decision-maker in their household. One of the best gifts you can give to your partner, especially if he or she isn’t that engaged with financial matters, is being very clear about here’s what to spend from, here’s what to leave undisturbed. So, in terms of where to go if you need cash, the emergency buffer that your household may have been maintaining would be a great, obviously, first line of defense. You may have life insurance proceeds, which would also be a nice spendable asset at this point in time. Another thing, and here’s a spot to get some financial advice before moving, but if your spouse had highly appreciated assets, highly appreciated assets in his or her own name, those can also be sources of liquid reserves. If you were to sell those securities, you can unlock some of those profits and do so at a pretty tax-advantaged state because you will likely receive a step-up in the cost basis.

That’s something else to look at. And then, finally, people may want to look to home equity lines of credit if they’ve exhausted some of the other things we’ve already talked about. So, you could line up that home equity line of credit if you have significant home equity and then maybe pay it back once things are a little bit more settled.

How to Handle a Spouse’s Retirement Accounts

Dziubinski: One of the key financial questions, of course, you touched on this, that you need to deal with as the spouse that’s left behind, is dealing with your partner’s retirement accounts. What are the choices here, and the main advantages and disadvantages of each of those?

Benz: So, really three main advantages. The first one would be roll it over into your own IRA, and you might decide to convert some of those assets at that time, but that’s sort of a separate decision. The other idea would be to roll it into an inherited IRA. And that can come into play if you’re not yet 59 and a half and you need the funds and you don’t want to be subject to that penalty that you would pay if you were pulling money out of your own IRA prior to age 59 and a half. That can be appropriate, especially for some of the younger spouses. And then the final option would be to forgo your inheritance in that portion of the IRA. And this is especially appropriate for people who are very wealthy, expect to pay estate tax themselves. It may be appropriate to allow those assets to pass to other heirs rather than claiming them yourself.

Long-Term Care and Estate Planning for Widows and Widowers

Dziubinski: Then lastly, we’ve talked about retirement planning for single people in a prior episode. And you made the point that long-term care and estate planning are especially important for singles. You say that’s also true for those who have lost their spouses. Why would you say that’s extra important for widows and widowers?

Benz: The reason is that spouses are often the first line of defense with long-term care and with estate planning decision-making for their partners. And it’s something that you as a newly single person would not have. So, it’s a good time to revisit your long-term-care plan as well as your estate plan. It maybe doesn’t need to be at the front of your queue, but definitely keep it on your to-do list because everything is different with the loss of a spouse. It pays to look at the estate plan, especially with a fresh set of eyes, as well as the long-term-care plan.

Dziubinski: Well, Christine, thank you so much for your time today. Very important information.

Benz: Thank you so much, Susan.

Dziubinski: If you’d like to hear more from Christine, be sure to sign up for her free weekly newsletter, Improving Your Finances. There’s a link beneath this video to sign up. Thanks for tuning in.