Your Retirement Plan Works for Two. Does It Still Work for One?

In today’s episode, you’ll learn more about:

• What happens to Social Security and pension income after one spouse dies.
• Why household expenses typically don’t fall by 50%.
• How the “widow’s tax penalty” and Medicare IRMAA can affect a surviving spouse.
• Why tax planning while both spouses are alive can matter later.
• Why both spouses should understand how their financial life works and know who to call.

Listen Now:

The Smart Take:

Go Inside the Episode: 

0:00 – Intro

4:10 – What Income Survives?

5:43 – Expenses Don’t Fall 50%

9:27 – Taxes + IRMAA

13:45 – Why Planning Together While Alive Matters

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick:

Most married couples build their retirement plan around two people, two social security benefits, maybe a pension, married tax brackets, shared expenses, and two people making decisions together. But eventually, there’s a good chance one spouse will have to manage that retirement plan alone. And when that happens, the financial math doesn’t simply get cut in half. Income can fall significantly, expenses may not fall as much, taxes can actually become less favorable, and the surviving spouse may suddenly be responsible for financial decisions they haven’t handled in years. Today, we’re going to look at what changes financially when one spouse dies and what couples can do today to make sure the surviving spouse is financially prepared.

Walter Storholt:

Hey, and welcome to another edition of Retire Smarter. I’m Walter Storholt alongside Tyler Emrick. He is a certified financial planner and a chartered financial analyst and one of the wealth advisors at True Wealth Design. And interesting episode today-

Tyler Emrick:

It is.

Walter Storholt:

… Tyler, because I don’t know why, but when you presented this as our topic today, I was kind of thinking, “Huh.” I guess I always thought you make a financial plan as a couple. And then when one of you passes away, you kind of start all over. But I never thought about trying to make a plan that works for two and also for one.

Tyler Emrick:

Yeah.

Walter Storholt:

I don’t know why I didn’t think about it that way, but I don’t know. Maybe you’re opening some eyes today to other viewers and listeners of the show.

Tyler Emrick:

Yeah, potentially. And hopefully, right? I mean, it should definitely be a piece of that initial plan, almost a stress test as you kind of think about it, right?

Walter Storholt:

Okay. Sure.

Tyler Emrick:

And we kind of are, “Hey.” We have all these potentially worst-case scenarios, market crashes, expenses go up significantly, all these things that we’re trying to plan for. Well, hey, having your spouse pass away is certainly one that I think deserves proper planning to make sure that, as a family, everybody understands kind of like, “Hey, how are the decisions that we’re making now impacting that surviving spouse? And how can we be more diligent and deliberate about making those decisions with that understanding?” Because things change.

Walter Storholt:

Isn’t that really hard, though? Because spouse could pass. We just did our last episode on the first year of retirement, right?

Tyler Emrick:

Mm-hmm. We did. We did.

Walter Storholt:

Spouse could pass away in the first year of retirement, unfortunately, or you could both live for 30-plus years in retirement. That’s a really big dramatic difference in possibility.

Tyler Emrick:

Oh, it is. Well, and I also think it’s something that most plans kind of lack and miss because it needs to be a deliberate conversation. And let’s be frank, a lot of families don’t… Some families don’t like talking about that worst-case scenario, right? It’s very-

Walter Storholt:

“Okay. So let’s say you go first in a year. Let’s just see what that looks like.”

Tyler Emrick:

End of plan.

Walter Storholt:

“Oh, yeah.”

Tyler Emrick:

End of plan.

Walter Storholt:

“Let’s dive into that scenario.”

Tyler Emrick:

End of plan. Yeah. But it is. It can be very difficult conversation and very tough, but it’s an important point.

Walter Storholt:

How many people have been eager to discuss-

Tyler Emrick:

None.

Walter Storholt:

… that in your office-

Tyler Emrick:

None. None.

Walter Storholt:

… over the years? Okay.

Tyler Emrick:

Now, we certainly have had families come in to where, hey, one spouse handles the finances and the other don’t. And they’re like, “Hey, I feel comfortable making these decisions, but I need my spouse to be involved more.”

I think back to my own personal situation with my father and my mother. My mother passed a number of years ago, but my mother did all of the finances in the house. And so I lived it when my mom passed, and then Dad and I were kind of like, “Okay, well, how do we pay bills? How do we write a check in the checkbooks and balance it?” and all that good stuff. And you’re doing that with, obviously, grieving the loss of… Well, at the time-

Walter Storholt:

Yes.

Tyler Emrick:

… my mom. It’s very difficult. So having these conversations, albeit kind of awkward at the beginning, I think are extremely important and certainly something to where I don’t think is maybe talked about or analyzed enough. So the way we structured today, I wanted to just point out some high-level things to be thinking of. And then maybe we get a little more granular on like, “Well, what are the decisions that you make from a planning standpoint, and how would they be impacted when you have this kind of thought in the back of your mind?” And we’ll give a few examples or…

Because I think at the beginning… And if you’re just now starting to like, “Ooh. I haven’t really put a whole lot of thought into it,” I think the first couple things that you can do is really just get a handle on like, “Well, hey, let’s simplify it. What’s coming in, and what’s going out?” Right?

Walter Storholt:

Yeah.

Tyler Emrick:

And the way I think about that is, well, okay, well, let’s dive into what’s coming in. What happens to my pension plan if I pass away? What percentage does my spouse get? Do they get nothing? Do they get 100%? What happens with Social Security? We do have three benefits through Social Security, generally, when we’re married. We have our own benefit that we worked for that’s under our working history. We have a spousal benefit, which is something your spouse can get while you’re alive. And then you have a widow’s benefit or a survivor’s benefit.

Well, how do those benefits change if one of us were to pass? And how does that impact those plan results? So understanding the cash flow in and what is actually going to go away and what is going to stay. Because in the case of Social Security, well, one of those payments are going to go away. If your spouse passes, you’re going to get the higher of the two benefits. If your pension goes, well, does that go away?

Certainly if you’re leaning on your assets, “Hey, I don’t have a pension, but we’ve got a distribution coming from our retirement accounts,” okay, well, those assets are probably going to stay. How’s the estate plan look? And is that going over to the spouse? And all that good stuff. So just taking an inventory of income, how it changes, I think is a good first step. The other thing that we would then pivot to would be expenses. And they do not fall by 50% just because the spouse passes, right?

Walter Storholt:

Very common assumption. That’s not usually correct.

Tyler Emrick:

Correct.

Walter Storholt:

Right?

Tyler Emrick:

Oh no, absolutely. Certainly I think the statistics show we see a little bit of a drop in spending, but that has everything to do with, well, what’s possible. When we build a plan, we’re talking to families and individuals a lot about just, “Well, what does that plan look like? How do you want to use the wealth you’ve created? What’s that spend look like?”

And then that conversation when we’re doing this test does pivot to like, “Well, what would you want to change?” A lot of times I’ll hear, “Well, I’m not going to travel as much. Hey, my spouse likes to travel. I do it because they like to do it a lot, but I wouldn’t see myself doing it.” Okay. Well, that’s something that when we run the tests like this, we could say, “All right. Well, that expense goes away or it drops.”

Certainly things like future car purchases and stuff like that, those are easy to potentially drop off, but having a very constructive conversation around it will make sure that proper expectations are set so that way we can plan to meet those expectations. So that’s the very beginning, easiest part, right? Income, how does it change, and expenses, what’s our goals, and how do we see those potentially changing if one of our spouses passes. So now we get down into the fun… Not fun stuff, but the, “Oh. What are we planning for, Walt?” Right?

Walter Storholt:

Yeah, yeah.

Tyler Emrick:

What actually happens that I think that is kind of missed when we go through a plan? And I think-

Walter Storholt:

So the what stays and what goes out and how much that drops by, that’s the basics?

Tyler Emrick:

That’s the basics. That’s the first step.

Walter Storholt:

Now we get into the real plan.

Tyler Emrick:

You got it, right?

Walter Storholt:

Yeah.

Tyler Emrick:

Because once we have those basics in, now we can go ahead and start to, “All right. Let’s develop a plan and see how it looks. Let’s project it out.” And I think what you’re going to first find is that you probably are going to have a very different tax situation than what you do while you’re married. And the reason for that, Walt, is… Well, the biggest one is you’re going to go from filing joint to filing single. So what does that really mean? Well, that means that your standard deduction’s going to get cut in half. That means that your tax brackets are going to go up higher more quickly, right? Where if we run this-

Walter Storholt:

Right.

Tyler Emrick:

… perfect plan and we kind of say, “Ooh. RMDs kick in your mid-seventies. We think your long-term tax bracket is going to be 22% while you’re alive.” And then we run through a scenario where one spouse passes early. Well, sure, we’re going to maybe give up some Social Security because you can only get one benefit. But a lot of times, those required minimum distributions, they don’t change. The surviving spouse would inherit those IRA accounts. They’re going to have required minimum distribution. So that tax is still coming. It’s very common for us to see the surviving spouse jump up into the 24% bracket or the 32% bracket. So that expected tax liability is much, much higher for a single person than it would be for an individual married filing jointly. So that’s the first thing, right?

Speaker 3:

What would your life look like if you designed it around your true wealth? It’s a powerful question and one that True Wealth Design helps individuals, families, and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments, and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no-cost, no-obligation discovery meeting. Just click the link in today’s show description to get started.

Walter Storholt:

All right. Peek behind the scenes real quick, Tyler, for our viewers and listeners. Tyler puts together a great outline for each of our episodes, surprise, surprise, a-

Tyler Emrick:

Try to.

Walter Storholt:

… well-prepared outline. So I’m following along with our outline as we’re discussing things back and forth often. And when I came across this, I saw the widow’s tax penalty, is what you had.

Tyler Emrick:

I did.

Walter Storholt:

That just sounds evil on the surface.

Tyler Emrick:

It does. It does.

Walter Storholt:

There is a widow’s tax penalty. That’s awful. But you’re saying this isn’t an actual tax, but it’s kind of the combination of consequences of what happened here.

Tyler Emrick:

The consequences. The one we just talked about, right?

Walter Storholt:

Okay?

Tyler Emrick:

That one of, “Hey, basically, you’re going from filing joint to eventually having to file single.” So the IRS is… You’re just going to go up into those higher tax brackets much, much more quickly, right?

Walter Storholt:

Mm-hmm.

Tyler Emrick:

So you’re right. Not a literal widow’s tax, but the half of those consequences.

Walter Storholt:

I’m like, “Whoever came up with that, my goodness.”

Tyler Emrick:

So, yeah. Our friend [inaudible 00:10:10].

Walter Storholt:

I’m going to run for office and just use that as my platform. You can’t lose railing against that if that-

Tyler Emrick:

That’s true. That’s true.

Walter Storholt:

… if that was a real thing.

Tyler Emrick:

This does not sound fun at all. Well, and the second tax thing that I had kind of in my arsenal here to be thinking about is not any better. That’s the whole IRMAA that we plan about, right?

Walter Storholt:

Mm-hmm.

Tyler Emrick:

Remember IRMAA is, “Hey, where your Part B premiums for your Medicare are increased and higher if your income’s higher.” Well, just like tax brackets getting cut in half, hey, those IRMAA income limits are now cut in half, too. So if you’re not losing a whole lot of income, your surviving spouse could be up into higher IRMAA brackets. Where you would’ve never had to deal with that before, well, now the surviving spouse does, and that’s increasing those costs, right?

Walter Storholt:

So not only did you not drop your expenses by half, you also have maybe actually increased some of the burdens that you have from a tax liability standpoint, so your cash flow and freedom is getting squeezed.

Tyler Emrick:

Exactly right. Exactly right. And as we think about like, well, okay, we understand the issue, well, how would we plan for it and how should you be thinking about the decisions that you’re making now? Well, with every family, we think about retirement planning. Inevitably, we’re going to talk about, “Well, what does your cash flow look like for the year, and how high do we want your income to be?” And a lot of times those are two separate numbers. You have a cash flow number to meet your needs from a spend standpoint, and then we have a goal of how high we want your income to be because it makes sense from a tax standpoint.

So a lot of times those conversations would be like, “Well, hey, when we run our plan out, once you guys hit your mid 70s and RMDs kick in, we see you being in the 22% tax bracket. Right now you’re in the 12. We could realize X amount more income and only pay 12% in taxes. That’s 10% less than what you’re going to be paying down the road. Hey, we should think about doing maybe a Roth conversion, paying taxes now at 12%, because we know down the road good old IRS is going to hit us for 22.” Okay. Simply.

Walter Storholt:

Yeah.

Tyler Emrick:

Simple conversation. Well, when you think about, “Well, let’s run what the surviving spouse’s situation looks like,” those tax brackets down the road when it’s just a surviving spouse could be substantially higher. And a lot of times they are.

So when we backtrack to that scenario, let’s say it’s not as clear cut. Let’s just say that we’re having a conversation where, “Hey, we think your long-term tax bracket federal’s going to be 22%.” You’re already in the 22% bracket, so we’re not really picking up any tax arbitrage or any benefit and paying less taxes now than what we would be down the road. But when you add in the analysis of the surviving spouse and you go and say, “Well, hey, there might not be a very compelling reason for you to take your income up higher now because the brackets are the same, but, hey, let’s look at this scenario where one of you were to pass away maybe earlier than what we expect,” now the surviving spouse is in the 24% bracket or 32. That might change the framing of how that conversation works. Right, Walt?

I mean, much easier for you to maybe say a yes and get behind that to say, “Okay. I don’t see a bunch of benefit now. But running this alternate scenario here, okay, I could totally see where that’s going to position the surviving spouse in a much, much more favorable light and give them much more flexibility down the road.” Right? So that’s what I-

Walter Storholt:

Yeah.

Tyler Emrick:

… mean by, well, not only running the scenario to say, “Would the surviving spouse be okay?” but then also, how do we make better decisions now in light of a possibility like this happening? And I think that’s a perfect-

Walter Storholt:

It would be nice if we could just not worry about it until it happens, but you’re laying out a lot of compelling reasons why planning while you’re both still alive makes a big difference.

Tyler Emrick:

Correct. Yeah. And it could absolutely change the decisions that you make in the here and now. And the income planning is one piece of it. Certainly as we think about other situations, how we build your estate plan or how we think about healthcare, all these things can kind of trickle down into it.

So if you’re working with a good financial advisor, they’ve done this analysis. And when they’re talking you through some of these big financial decisions, they’re going to be bringing up some of these alternate scenarios and how this decision’s going to impact it. And that’s how I think you know you’re kind of working with a good advisor because they’re thinking through some of those scenarios that might not be top of mind to you currently, but certainly impact some of the decisions that you’re going to have in front of you.

Walter Storholt:

And I think this kind of comes to your final point, too, of it’s that softer side, right?

Tyler Emrick:

Mm-hmm.

Walter Storholt:

We can have numbers, taxes, all the intense stuff, but just as important, the softer side of the conversation, you alluded to it earlier, making sure everybody’s comfortable, same page, communicating. How do things work? Even if you’re not the one that manages the day-to-day and all the know-how of the finances, that’s a really important point to drive home to finish.

Tyler Emrick:

Oh, 100%. And I think a lot of these conversations happen maybe when financial advisors start working with individuals and families. They’re running maybe an insurance-

Walter Storholt:

When you play marriage counselor a little bit at the beginning?

Tyler Emrick:

A little bit. Yeah, yeah. Trying to figure out goals and objectives and how they’re trying to accomplish what they want to do and the wealth they’ve created. But we’re always running in top of mind, well, hey, if we’re working with a family, what’s the need from an insurance standpoint? Do we need anything? Do we not? How do we want to make decisions on pensions? How do we want to make our decisions on Social Security? So these can be very top of mind when you first start working with a family.

But that scenario we just talked about, that’s a scenario that happens on a consistent basis every year where you’re trying to make decisions in the here and now on, “Do I do Roth conversions? Do I not?” Well, okay. That’s decisions you’re going to pretty much make every year. So rehashing that, having an understanding of it, doing some of that work, I think just makes you make a better informed decision.

And two, I mean, I kind of go back and think about the families that I’ve worked with over the years. I think when you plan for stuff like this, I also think it brings in maybe a spouse that doesn’t look at finances, doesn’t enjoy finances, doesn’t think about it. It can help drive those conversations to make sure that maybe the spouse that takes a little bit of a backseat in finances, but front seat elsewhere, well, they still feel comfortable about those decisions, understand how everything works, and making sure that their voice is heard on some of those decisions. So inevitably, if they get in a situation like my dad found himself in where he lost his wife, my mom who did all those finances, you’re not kind of reinventing the wheel, starting from scratch, trying to make those decisions after the fact. You feel like that transition maybe is a little bit easier. Never going to be easy, but at least the financial side of it, you feel like you have a little bit more of a handle on it. And I think that’s always important as well.

Walter Storholt:

Yeah, hugely important. Well, great outline today, Tyler. A lot of things to be thinking about when we’re going through the planning process. You should be having these conversations. What are you going to do? How does your plan hold up? I think the stress test is a great way to describe that because it is stressful to talk about-

Tyler Emrick:

It is.

Walter Storholt:

… and to think about-

Tyler Emrick:

It is.

Walter Storholt:

… in the meeting, but that kind of is true to the name of what you need to do for your plan if you truly want to be ready for these different scenarios and to make sure that your loved one’s going to be okay if you’re the one that goes or vice versa. And I think that’s just the mature and smart thing to do, even if it is tough to talk about. So sometimes it’s easier to do that with another person involved, like an advisor who’s going to walk you through these things and facilitate that conversation, maybe one of the most important pieces of the planning process you go through if you really think about it.

So if you’re not going through that, we invite you to reach out, talk to Tyler and the team about your situation. We can talk about some general stuff here on the show, but to get into the specifics of your situation, that one-on-one conversation is needed. The first conversation is always very easy to set up. You just click the link in the description of today’s show or go to truewealthdesign.com and look for the let’s talk button. And what you’re going to do is just schedule about a 20-minute discovery call with an experienced advisor on the team, and you’ll be able to see if you’re a good fit to work with one another, where some of the gaps in your plan might be, and you can have that illustration of like, “What’s this planning process going to do for me? Where are we really going to move the needle?” You can already start to discover that in those first couple of minutes of conversation. So it’s pretty cool. Take advantage of that free discovery call with Tyler and the team. Again, click the link of the description or go to truewealthdesign.com.

Tyler, good episode today. Thanks for this. And we’ll chat with you again soon.

Tyler Emrick:

Absolutely.

Walter Storholt:

All right. We’ll see everybody next time right back here on Retire Smarter.

Speaker 4:

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