Why the Solo Years are Critical and How to Plan for Them

Married couples in or near retirement should know that the solo years, the period after one spouse passed away, usually are the most difficult period in retirement both financially and emotionally.

As I say in Chapter 17 of my book, “Retirement Watch: The Essential Guide to ‘Retiring in the 2020s’” the solo years are when most retirement plans are likely to fail or falter. The financial difficulties of the period could be reduced with proper financial planning, something missing from most retirement plans.

Because of changes that occur during the solo years, a once-solid plan too often doesn’t work well after one spouse passes away.

Consider these major changes in household finances and management to which most surviving spouses must adapt:

• One Social Security benefit will end.
• Other sources of income, such as pensions and annuities, might end or be reduced.
• Some household expenses are likely to increase. People often must be hired to do many chores and activities that one spouse used to do or both spouses could do together.
• Income taxes are likely to increase, even after income declines, because the surviving spouse has a different filing status.

Those are the almost-universal changes that occur after one spouse passes away, but some surviving spouses face other changes and adjustments unique to their situations.

The difficulties of the solo years are determined by how much thought was given to them when the retirement plan was developed and revised.

Many surviving spouses are surprised to find that federal income taxes can increase substantially after one spouse passes away, even if there’s been a decline in household income. This doesn’t happen to all surviving spouses, but it happens often enough that tax and financial planners recognize it and often call the phenomenon the widow’s penalty tax.

Despite the name, income taxes are likely to increase whichever spouse is the survivor and is more accurately called the surviving spouse’s penalty tax. The less income declines, the more significant the tax penalty.

This isn’t a separate penalty in the tax code, such as the penalty for underpaying estimated taxes. It’s a consequence of the way the tax code is written and how it interacts with the changes that occur after one spouse passes away.

When both spouses are alive, the couple’s tax return filing status is married filing jointly. A surviving spouse is allowed to use the married filing jointly filing status only for the year in which the other spouse died. Beginning the first full year after one spouse passes away, the surviving spouse’s filing status changes to single. The married filing jointly status is the most beneficial, while the single filing status is comparatively unfavorable.

(Most widowed retirees don’t qualify for the favorable surviving spouse filing status.)

Here’s how the change in filing status affects a surviving spouse.

In 2023, taxpayers who are married filing jointly stay in the 12% tax bracket until their taxable income exceeded $89,450. But a single taxpayer stayed in the 12% bracket only until taxable income exceeded $44,725. The 22% tax bracket applied to a married couple filing jointly until taxable income exceeded $190,750 but for a single taxpayer the ceiling for the 22% bracket was taxable income of $95,375. (The break points of the income tax brackets change each year because of inflation adjustments.)

You can see the surviving spouse is hit with a double whammy.

First, as I said earlier, income is likely to decline. The household begins receiving only one Social Security check instead of two. Other sources of income also might decline. For example, the deceased spouse might have been receiving a pension or annuity that upon his or her death either ends or pays a reduced amount to the surviving spouse.

Second, the surviving spouse is pushed into a higher tax bracket. The income usually doesn’t decline enough to keep the surviving spouse in the same tax bracket after becoming a single taxpayer. If it did, that would be a very significant decline, requiring the income to be cut in half. Instead, the surviving spouse loses some income but also pays a higher income tax rate on the remaining income because of the change in filing status.

That’s not the only federal tax penalty on a surviving spouse. Medicare beneficiaries with higher incomes are subject to a Medicare premium surtax, also known as IRMAA (income-related monthly adjustment amount). The higher a beneficiary’s modified adjusted gross income, the more Medicare premiums increase. (More details about IRMAA are in our March 2021 issue.)

As with income taxes, the Medicare premium surtax is imposed at different income levels on people with different tax filing statuses. A single taxpayer with the same modified adjusted gross income as a married couple will pay twice the Medicare surtax as the couple. A newly widowed taxpayer who retains a high percentage of the couple’s previous income could pay a Medicare premium surtax equal to or exceeding what the couple paid jointly.

Higher income taxes on Social Security benefits could be another survivor’s penalty tax. A portion of Social Security benefits is included in gross income when modified adjusted gross income is above a certain level, and the amount of benefits included in gross income increases as modified adjusted income increases.

Unlike the other taxes, the trigger points for the inclusion of Social Security benefits in gross income aren’t adjusted for inflation each year. That means as inflation increases, more and more people include Social Security benefits in gross income. Within a few years, about 80% of Social Security beneficiaries will pay income taxes on a portion of their benefits.

The financial changes in the solo years are one reason I recommend that the spouse with the higher lifetime earnings delay receiving Social Security benefits as long as possible or until age 70 when benefits are maximized. That ensures whichever spouse survives the other, the Social Security benefit coming to the household will be as high as possible.

It is also a good idea while both spouses are alive for them to review the cost of maintaining the residence and discuss the actions the surviving spouse should take regarding the residence. That makes it likely a more thorough, less emotional decision is made and takes a burden off the surviving spouse.