By Jordan Hegedus
This time of year when you see the headline “when two becomes one,” you may think of matrimony. However, what happens if the opposite occurs and the household now includes only one adult? When a couple separates or one spouse dies, there are several financial issues that can impact the newly-single person’s lifestyle. Although there are many financial similarities with divorce and death, this article will focus on the death of a spouse — which should be part of every couple’s plans.
When planning for the financial impact of a spouse dying, a good technique is to generate a table such as the one below for a couple when both are retired:
Both Spouse A Spouse B
Monthly Income Living Survives Survives
A’s Social Security $3,000 $3,000 0
B’s Social Security $2,000 0 $3,000
A & B’s IRA $3,600 $3,600 $3,600
Total Income $8,600 $6,600 $6,600
Total Expenses* –$7,200 –$6,800 -$6,600
Surplus/-Shortfall $1,400 -$200 0
*Expenses include income, property, and excise taxes, mortgage/rent and auto loan payments, maintenance/utilities, Medicare/other insurance, entertainment/vacations, etc. Assume Spouse A requires additional drug and health club fees.
The above example is just a snapshot of one year. As we’ve seen recently, inflation and stock market volatility can have a large impact on your budget. So, the shortfall to the survivor may increase if income growth doesn’t keep pace with increasing expenses.
For the surviving spouse, taxes may increase.
The standard deduction in 2023 for married couples age 65 and over is $29,550, but it’s $15,350 for the survivor. So, the survivor will need to recognize $14,200 more taxable income. Also, the tax brackets are more compressed. So, the survivor moves from the 12 percent marginal tax bracket to 22 percent with Adjusted Gross Income (AGI) after deductions and exemptions above $44,725. Married couples moved into the 22 percent bracket above $89,450. Long-term capital gains and dividend rate brackets are similarly compressed. Both of these brackets are actually more favorable than those prior to 2017.
Spoiler Alert! These favorable rates are scheduled to sunset with taxes effective in 2026!
It’s possible that the surviving spouse may need chronic long-term care. When both were alive, this care might have been handled by the other spouse. If financial provisions aren’t made for this need, assets could be quickly depleted and that spouse could be dependent on Medicaid.
The bottom line: when planning for retirement, it’s imperative that couples plan not only for living together but also for the impact after one spouse dies. Financial planners and estate attorneys can help with your particular situation.
Jordan Hegedus, CLU, ChFC can be reached at jordan@GoToBeaconLife.com.
