After a spouse dies, the survivor’s financial situation often changes for the worse
After a spouse dies, the survivor often ends up paying higher taxes on less income — something known by accountants and financial planners as the “widow’s penalty,” because women typically outlive their husbands.
Couples who know what’s coming often can take steps to soften the penalty’s effect, but too many don’t think far enough ahead, says Barbara O’Neill, a certified financial planner and educator in Ocala, Florida.
“A lot of people just underestimate what the impact will be financially,” O’Neil says.
INCOMES PLUNGE BUT EXPENSES MAY NOT
A spouse’s death often leads to a substantial drop in income. Wages or salary typically end if the deceased spouse was still working, and many people don’t have enough life insurance to replace that loss.
If a couple is retired and receiving Social Security, the benefit amount can drop by one third to one half. The survivor gets the larger of the two checks the couple received, and the smaller benefit goes away. If the deceased spouse received pension or annuity payments, the survivor may get a reduced amount or nothing at all, depending on what payout option the couple chose.
The income decline may be offset by lower expenses, such as reduced bills for groceries or auto insurance for one vehicle instead of two, says O’Neill, author of “Flipping a Switch: Your Guide to Happiness and Financial Security in Later Life.” But some expenses could go up. The survivor may hire help to perform some of the chores the deceased previously handled, for example. Or they may want to subscribe to a medical alert service now that they’re living alone, she says.
And then there are the tax bills.
TAXES AND MEDICARE
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