Retirement

Why The Solo Years Of Retirement Are The Most Critical And How To Plan For Them

Married couples in or near retirement should know that the solo years, the period after one spouse passed away, usually are the most difficult period in retirement both financially and emotionally.

The solo years are when most retirement plans are likely to fail or falter. The financial difficulties of the period could be reduced with proper financial planning, something missing from most retirement plans.

Consider these major changes in household finances and management to which most surviving spouses must adapt:

* One Social Security benefit will end.

* Other sources of income, such as pensions and annuities, might end or be reduced.

* Some household expenses are likely to increase. People often have to be hired to do many chores and activities the deceased spouse used to do or both spouses did together.

* Income taxes are likely to increase, even after income declines, because the surviving spouse has a different filing status.

Many surviving spouses are surprised to find that federal income taxes can increase substantially after one spouse passes away, even if there’s been a decline in household income. This doesn’t happen to all surviving spouses, but it happens often enough that tax and financial planners recognize it and often call the phenomenon the widow’s penalty tax.

It’s more-accurately called the survivor’s penalty tax, because it applies equally to widows and widowers.

The less income declines, the more significant the tax penalty is.

This isn’t a separate penalty in the tax code, such as the penalty for underpaying estimated taxes. It’s a result of how the tax code interacts with the changes that occur after one spouse passes away.

When both spouses are alive, the couple’s tax return filing status is married filing jointly. A surviving spouse is allowed to use the married filing jointly filing status only for the year in which the other spouse died. Beginning the first full year after one spouse passes away, the surviving spouse’s filing status changes to single. The married filing jointly status is the most beneficial while the single filing status is comparatively unfavorable.

(Most widowed retirees don’t qualify for the favorable surviving spouse filing status.)

Here’s how the change in filing status affects a surviving spouse.

In 2024, taxpayers who are married filing jointly stay in the 12 percent tax bracket until their taxable income exceeded $94,300. But a single taxpayer stayed in the 12 percent bracket only until taxable income exceeded $47,150. The 22 percent tax bracket applied to a married couple filing jointly until taxable income exceeded $201,150 but for a single taxpayer the ceiling for the 22 percent bracket was taxable income of $100,525. (The break points of the income tax brackets change each year because of inflation adjustments.)

You can see the surviving spouse is hit with a double whammy.

First as I said earlier, income is likely to decline. The household begins receiving only one Social Security check instead of two. Other sources of income also might decline.

Second, the surviving spouse is pushed into a higher tax bracket. The income usually doesn’t decline enough to keep the surviving spouse in the same tax bracket after becoming a single taxpayer. If it did, that would be a very significant decline, requiring the income to be cut in half. Instead, the surviving spouse loses some income but also pays a higher income tax rate on the remaining income because of the change in filing status.

That’s not the only federal tax penalty on a surviving spouse. Medicare beneficiaries with higher incomes are subject to a Medicare premium surtax, also known as IRMAA (income-related monthly adjustment amount). The higher a beneficiary’s modified adjusted gross income, the more Medicare premiums increase.

As with income taxes, the Medicare premium surtax is imposed at different income levels on people with different tax filing statuses. A single taxpayer with the same modified adjusted gross income as a married couple will pay twice the Medicare surtax as the couple. A newly-widowed taxpayer could pay a Medicare premium surtax equal to or exceeding what the couple paid jointly.

The same interplay applies to income taxes on Social Security benefits, creating another survivor’s penalty tax.

The financial changes in the solo years are one reason I recommend that the spouse with the higher lifetime earnings delay receiving Social Security benefits as long as possible, preferably until age 70 when benefits are maximized. That ensures whichever spouse survives the other, the Social Security benefit coming in to the household will be as high as possible.

It’s also a good idea while both spouses are alive for them to review the cost of maintaining the residence and discuss the actions the surviving spouse should take regarding the residence. That makes it likely a more thorough, less emotional decision is made and takes a burden off the surviving spouse.

The couple also needs to consider other ways to counter the negative effects of the solo years, such as by obtaining permanent life insurance or spending less while both spouses are alive.

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