As you prepare for retirement, you’re likely focused on how you and your spouse will cross items off your bucket list, making many precious memories. You’re not likely to plan on losing your spouse; however, more than 50% of women and 25% of men are widowed by age 75.
As you age, the reality that one partner will pass before the other is inevitable. Typically, because women live longer than men and men are older than women at the time of a marriage, men are more likely to die first, leaving their wives facing an uncertain financial future. Women also earn less money than men and are more likely to take breaks from their careers for caregiving, meaning they have less in overall earnings and less in retirement savings.
Loss of a spouse is correlated with increased financial insecurity in retirement. Research reveals that an average widow’s income drops by 35% after her husband passes away. In fact, more than half of widows surveyed report a lack of planning prior to the death of their spouse that led to financial anxiety and a financial burden following bereavement. Widows also face higher taxes, as they must file as single in the year after they are widowed and also have fewer deductions.
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Fortunately, intentional financial planning can position you and your spouse to avoid this dire situation. In this article, we’ll explore some strategies to help create financial stability for a surviving spouse.
Strategy No. 1: Delay Social Security
When a spouse dies, the surviving spouse receives the larger Social Security benefit based on the benefits of the two spouses. Typically, the husband has the larger benefit.
To help ensure this benefit is as large as possible for a surviving widow, the husband should delay claiming Social Security for as long as possible. At age 70, beneficiaries receive the largest benefit possible, so waiting until that date is beneficial for the surviving spouse.
Each year that Social Security is delayed results in an 8% increase. For example, if your monthly benefit at the full retirement age of 67 in 2027 will be $3,413 (accounting for inflation), waiting until age 70 in 2030 will increase that benefit by $1,310 a month to $4,723 (accounting for inflation). The additional income that the waiting period generates is likely to make a big difference in the living standards of your surviving spouse, should you die first.
Strategy No. 2: Leverage step-up in basis
When a spouse dies, the surviving spouse benefits from what is known as step-up in basis. That means that any real estate or stocks, bonds or other securities held outside of a retirement account will have their cost basis stepped up to the value of that specific security on the date of the spouse’s death.
For example, if you and your spouse bought a home for $300,000 in 1995 and the home had appreciated to $800,000 by the date of your spouse’s death, the new tax basis for your home would be $800,000 instead of $300,000. That means that if you wanted to sell your house after your spouse’s death and downsize, your tax bill would be much lower, if not non-existent. Selling that primary home within two years of a spouse’s death means that you can exclude up to $500,000 of capital gains, which is potentially very useful in an era of rising home prices.
In addition, your stocks, bonds and any other securities held outside retirement accounts receive this step-up in basis. This can be useful if you have expenses that you need cash for in the wake of your bereavement, because you could sell stocks or bonds without incurring capital gains taxes.
Strategy No. 3: Avoid IRMAA
The income-related monthly adjustment amount (IRMAA) is a monthly Medicare premium surcharge that higher-income widows may get caught up in. That’s because in the year after a spouse’s death, widows must file their taxes as single. Even if your income declines at the death of a spouse, you lose many benefits from the tax status of married filing jointly.
If you need to take higher traditional IRA distributions to maintain your lifestyle, such distributions may increase your vulnerability to IRMAA and higher Medicare payments. Don’t think it can’t happen to you; in 2025, 8 million Americans are expected to pay higher Medicare premiums due to IRMAA.
To avoid IRMAA, you can convert traditional IRAs into Roths before your spouse dies. Roth conversions reduce the amount of required minimum distributions (RMDs) you are required to take because they are tax-free at distribution; however, you must pay tax upon conversion. In the year that your spouse dies, you can take advantage of being in married filing jointly tax status by engaging in conversions to reduce your RMDs going forward.
Preparing for the inevitable
While the death of a spouse in retirement is all but inevitable, financial hardship in widowhood is not preordained. By taking these three steps before and after the death of a spouse, you can help to gain financial stability.
Related Content
- Don’t Let the 'Widow's Penalty' Blindside You: How to Prepare
- Five Financial Changes That Happen When Your Spouse Dies
- Social Security for Widowed Parents Falls Far Short of Need
- How to Qualify for Social Security Spousal and Survivor Benefits
- Six Ways to Prepare for Widowhood and Protect the Surviving Spouse
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