Addressing the Retirement Needs of Widows and Widowers

While life insurance policies aren’t usually so set in stone, owners will likewise need to plan far ahead to ensure their survivors will reap the benefits – particularly when working with term life insurance. “Insurance planning from the beginning has to be focused around what’s likely to happen later in life,” said Murray. “When a client dies at 65, and his renewable term policy ended at 64, the spouse realizes no benefits.” In cases where clients’ premiums seem too high, either cutting back on other expenses or finding a more affordable policy can prevent such a disaster.

Tax Considerations

When it comes to minimizing tax liabilities, widowhood – particularly the first few years – presents both challenges and opportunities. “One of the biggest concerns of a recent widow or widower is the sequence of returns,” said Simasko. “It won’t affect your bottom line while you’re still contributing to your retirement accounts, but once you retire, a negative sequence will devastate you early on.” A household’s income often reduces by half or more when one spouse dies, but when expenses remain roughly the same, it becomes even more important to protect those accounts from rapid losses.

How can widows and widowers avoid these losses early on? “The first year of widowhood is a great time to pull money out of an inherited IRA,” said Simasko. “If you can increase retirement account distributions in the first year of death, it’s a huge benefit for tax planning. You’ve got a bigger bracket and a hugely decreased income.” Pulling large amounts from an IRA early on also lowers the minimum requirement distributions later on, when the survivor won’t have the advantage of that higher tax bracket. This consideration is particularly important in light of Medicare’s non-inflation-adjusted surcharge brackets, which take into account almost every form of income and include earnings from up two years prior to retirement.

Asset Reallocation and Budgeting

The risks and challenges of a sudden drop in income will also make it necessary for most clients to reallocate their money into safer assets. “You need to rethink the typical stock and bond mixes and reallocate to products that protect from downsides – things like annuities that allow you to share in growth but not losses,” said Simasko. He noted that while bankers, stock brokers and others without fiduciary duty are often reluctant to recommend such products, it’s relatively easy to convince clients of their merit.

Finally, most widows and widowers will need to rethink their spending habits and future plans – even if they are able to take large withdrawals from inherited retirement accounts early on. “A financial planner needs to create a completely new budget and financial plan for the client,” said Murray. “The key is to consider their values and future needs – where their kids are, how much they want to travel and what kinds of medical and long-term care they’ll need – and create a plan them keeps them afloat.”