Skeels Cygan: Taking a look at longevity and financial issues for widows

The average life expectancy at birth is reportedly 75.8 years for men and 81.1 years for women. However, these statistics include risks faced since birth and throughout mid-life, which include infant mortality, gun deaths, drug overdoses, suicide, auto accidents and early deaths due to chronic diseases.

Once a person reaches age 65, their expected lifespan is much longer. Retirement expert Annamaria Lusardi of Stanford University reports that a 65-year-old woman has a 40% chance of living to age 90, and a 65-year-old man has a 30% chance. According to her research, the average age of death for a 65-year-old woman is 87, and for a man is 84.

As more seniors are living longer, the term “longevity risk” is used frequently in the financial industry. Longevity is the reason so many retirees worry about running out of money before they die. It is also the reason most financial advisers recommend saving large amounts and planning for a retirement period of 30 years.

Today’s article focuses on the financial issues impacting widows. Surprisingly, the average age for becoming a widow is 59, and, in traditional marriages, men die first roughly 80% of the time. The topic is broad and complex, and grief following a spouse’s death involves far more than money. A commonly used stress assessment tool, the Holmes-Rahe Stress Inventory, reports becoming a widow as number one on the scale, followed by divorce at number two.

Social Security benefits

In a traditional marriage, both spouses typically receive Social Security benefits during retirement. When one spouse dies, the smaller benefit goes away and the larger benefit continues. The Social Security Administration reports that the average American widow sees a 37% decline in household income, and the poverty rate among elderly widows is three to four times higher than that of their married peers.

Potentially reduced pension benefits

Old-fashioned pensions are far less common than they were 20 years ago. However, careers that involve working for the government or a municipality, the military and certain corporations still provide a pension for retirees. When a person with a pension retires, he or she is required to make a selection, which cannot be changed at a later date. This is called a “survivorship benefit election,” and it determines how much a surviving spouse will receive if the pension owner dies first. The choices are often no monthly benefit for their spouse after they die, or options such as 50%, 75%, or 100% for the surviving spouse. Choosing no benefit for a surviving spouse results in a higher monthly benefit while the retiree is alive, while choosing to leave a surviving spouse 50%, 75%, or 100% will result in receiving a smaller amount each month.

Recognizing that none of us know how long we will live, I recommend that retirees with pensions choose an option that will protect their surviving spouse. If the spouse with a pension dies first, leaving the surviving spouse with a monthly pension for their remaining life is very valuable for their financial security.

Higher taxes

In the year a spouse dies, the surviving spouse can file taxes as a “married couple, filing jointly.” However, beginning the following year, the surviving spouse must file as a “single filer.” This leads to a significantly higher tax rate for a widow because the standard deduction is double for a married couple compared to a single filer. The taxes will not be double as some articles suggest, but they have been estimated to be 31% to 53% higher than if a widow could continue filing as married.

There are numerous tax and financial issues that arise due to a spouse’s death. One major factor is the “step-up” in basis that results in assets in taxable accounts. In community property states like New Mexico, assets owned by both spouses receive a step-up. This can lead to opportunities to make positive changes to an investment portfolio without expensive tax consequences. There are also legal issues — such as updating legal documents and beneficiary statements — that need to be addressed.

When possible, a widow is advised to form a team with an estate attorney, a CPA, and a financial adviser who is a fiduciary. All three of these professionals should work together in the widow’s best interest. Planning ahead — and knowing how your income may change if your spouse dies — is always wise.