When a spouse dies, how do survivors cope with lost income?

The Social Security Administration provides survivor benefits to widows and widowers, which can help replace a portion of the lost income. One of the first considerations for many surviving spouses is how their Social Security benefits will change. Here's what you need to know:

• Eligibility. Generally, you can receive full survivors benefits at your full retirement age (which varies depending on your birth year) or reduced benefits as early as age 60.
• Benefit amount. If you've reached full retirement age, you're eligible to receive 100% of your deceased spouse's basic benefit amount. If you claim between age 60 and full retirement age, you'll receive between 71.5% and 99% of the benefit.
• Your own benefits. If you're eligible for retirement benefits on your own record, you can switch to those benefits if they're higher than the survivor benefits.
• Working while receiving benefits. If you're working and haven't reached full retirement age, your benefits may be reduced if your earnings exceed certain limits.

It's important to note that while survivor benefits can provide a crucial income stream, they typically don't fully replace the lost income from a deceased spouse. This is where additional strategies come into play.

The death of a spouse often leads to a significant drop in household income. Research from the Chicago Fed shows that, on average, widowhood results in an 11% decline in income, even after accounting for reduced household size. This income reduction can lead to several financial challenges, starting with housing costs. Many surviving spouses find that housing expenses consume a larger portion of their income. According to the Consumer Financial Protection Bureau, 35% of widowed homeowners spend 30% or more of their income on housing costs, compared to 22% of the general older population.

Besides mortgages, existing debts such as credit cards and medical bills can become even more burdensome with reduced income. Meanwhile, health care costs often increase as individuals age. Managing these costs on a single income can be challenging. What’s worse is that reduced income can impact long-term savings and investment strategies, potentially affecting retirement plans.

Life insurance is a powerful tool for replacing lost income after the death of a spouse. If your deceased spouse had a life insurance policy, the death benefit can provide a lump sum to help cover immediate expenses and potentially generate ongoing income. Here are some strategies to consider:

• Immediate expenses. Use a portion of the death benefit to cover funeral costs, outstanding debts and other immediate financial needs.
• Income replacement. Consider using part of the death benefit to purchase an annuity, which can provide a guaranteed stream of income for a specified period or for life.
• Invest for growth and income. Depending on your risk tolerance and financial needs, you might invest a portion of the death benefit in a diversified portfolio aimed at generating both growth and income.
• Pay off the mortgage. Using the death benefit to pay off your mortgage can significantly reduce your monthly expenses, freeing up more of your ongoing income for other needs.

If you don't currently have life insurance, it's worth considering purchasing a policy to protect your own surviving spouse or beneficiaries in the future.

Married couples can secure lifelong financial stability through joint lifetime income annuities, which provide guaranteed income for both spouses' lifetimes. This type of annuity, purchased with a lump sum payment, continues to pay out as long as either spouse is alive, offering peace of mind for the surviving partner. In a joint lifetime income annuity, the surviving spouse receives the same payment amount after their partner's death. The insurance company calculates payments based on factors such as the couple's ages and life expectancies.

A popular and effective retirement income planning strategy for married couples involves leveraging individual retirement accounts to create a balanced approach to financial security, growth and lifetime income. In this strategy, one spouse might reposition funds from their IRA or 401(k) into a single-premium joint income annuity. This annuity provides a reliable income stream to cover essential expenses throughout both spouses' lives, mitigating the risk of outliving their savings.

Meanwhile, the other spouse's retirement accounts can be used to diversify assets strategically across various vehicles. This approach might include:

• Investing in a diversified portfolio of stocks and bonds for growth potential.
• Allocating funds to conservative investments like bond funds or CDs for stability.
• Exploring other income-generating options such as dividend-paying stocks or REITs.
• Maintaining a cash reserve for emergencies and short-term needs.

This strategy offers numerous benefits, including guaranteed income, longevity protection, diversification and flexibility. The annuity provides a stable "income floor" for basic living expenses, while the diversified investments in the other spouse's accounts offer potential for growth and additional income. This balanced approach helps couples maintain financial security while still having liquid assets available for other needs or opportunities.

However, it's crucial to recognize that this strategy may not suit everyone's needs. Factors such as overall financial situation, health, risk tolerance and specific retirement goals should be carefully evaluated. Seeking advice from a trusted financial professional can help ensure that any retirement strategy aligns with a couple's unique circumstances and objectives, ultimately leading to a more secure and comfortable retirement for both partners.

Annuities can be an effective tool for creating a reliable income stream after the loss of a spouse. They offer several advantages:

• Guaranteed income. Many annuities provide a guaranteed income stream for a specified period or for life, helping to replace the lost income from a deceased spouse.
• Tax-deferred growth. The money in an annuity grows tax-deferred until withdrawal, potentially allowing for greater accumulation over time.
• Flexibility. Various types of annuities are available to suit different needs, including immediate annuities for current income and deferred annuities for future income.
• Protection against market volatility. Fixed and indexed annuities offer protection against market downturns, providing a level of financial security during uncertain times.

Beyond replacing lost income and maintaining liquidity, consider these strategies for overall financial stability after the death of a spouse:

• Reassess your budget. Review your expenses and create a new budget that reflects your changed financial situation.
• Evaluate your housing situation. Consider whether downsizing or relocating could reduce your expenses without sacrificing quality of life.
• Review and update your estate plan. Ensure your will, trusts and beneficiary designations reflect your current wishes and estate planning situation.
• Explore available benefits. Check if you're eligible for any additional benefits, such as Veterans Administration benefits or employer-provided survivor benefits.
• Seek professional advice. Work with a financial professional who specializes in retirement income planning to create a comprehensive strategy tailored to your needs.

The financial challenges after losing a spouse can be complex and overwhelming. However, with careful planning and the right strategies, surviving spouses can maintain financial stability and security in their later years. The key is to take a comprehensive approach that addresses both immediate needs and long-term financial health. This includes maximizing Social Security survivor benefits, leveraging life insurance payouts if available, and considering annuities as a tool for creating reliable, lifelong income streams. Joint lifetime income annuities, in particular, can play a crucial role in ensuring financial stability for both spouses throughout their lifetimes.

Additionally, strategically managing retirement accounts, reassessing budgets, evaluating housing situations and updating estate plans are all important steps in adapting to new financial circumstances. It's also vital to explore all available benefits and maintain adequate liquidity for unexpected expenses.

While these strategies can provide a strong foundation, it's important to remember that every situation is unique. Factors such as overall financial situation, health, risk tolerance and specific retirement goals can significantly impact the effectiveness of different approaches. Therefore, seeking advice from a trusted financial professional who specializes in retirement income planning is crucial. They can help create a tailored strategy that aligns with your individual circumstances and objectives.