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Income Planning for the Surviving Spouse

Income Planning for the Surviving Spouse

July 21, 2022

No one wants to think about losing a loved one, especially a spouse. But we have a fiduciary duty to our clients to plan for it. As retirement income specialists, we are always focused on the cash flow of our clients and helping them maintain their lifestyle throughout retirement. In this article, I will go over how couples can plan ahead to make sure the surviving spouse maintains a comfortable income.

Social Security is the foundation of most retirees’ income. When one spouse passes away, the surviving spouse keeps the higher of the couples’ Social Security benefits and loses the other. Therefore, we generally recommend one spouse (usually the higher earner) grow their Social Security benefit as much as possible. Every year one delays claiming their Social Security Benefit, the benefit grows by 6-8%. So, the longer one delays claiming, the bigger the benefit.

Having a pension can also be a significant part of one’s income in retirement. Most pensions offer different benefit options. The option with the highest payout usually only lasts the duration of one’s lifetime. Although this can be appealing, the other options provide a great opportunity to plan for the surviving spouse’s income. In these other options, one can take a slightly reduced monthly payout to ensure the pension lasts for both spouses’ lifetimes. It is crucial to review the options and how they fit into one’s overall plan before turning on a pension.

The final area I want to cover is tax planning. Often times, when one spouse passes away, income goes down and taxes go up. This can make it more difficult for the survivor to meet his/her basic needs. In order to reduce the impact or even prevent this, we encourage folks to focus on tax diversification. This means having investments in the various “tax funnels” of pre-tax, post-tax, and tax advantaged accounts. Pre-tax accounts include IRAs, 401k’s, and 403b’s. Post-tax accounts include brokerage accounts and bank accounts. Tax-advantage accounts include Roth IRAs and Health Savings Accounts. Each tax funnel has its own advantages and disadvantages. But having money in each funnel will provide greater flexibility in retirement.

As with most financial planning, there is no one-size-fits-all solution. It is important to have a plan based on one’s own specific situation. Hopefully, this has given some insight into one area we as financial planners are focused on for our clients. Please do not hesitate to contact us if you have any questions.