When you plan for retirement as a couple, it’s natural to focus on the financial picture you’ll have together: your combined Social Security benefits, pension income, retirement savings, investments and household expenses.
But what happens if one spouse passes away?
The surviving spouse may face a significant change in their financial situation. Income can decrease, while many household expenses remain largely the same. At the same time, Social Security benefits, taxes, Medicare costs, pensions and other parts of the financial plan may change.
This is often referred to as the widow’s penalty.
The widow’s penalty isn’t a specific tax or financial penalty imposed on someone after losing a spouse. Instead, it’s a term used to describe the financial challenges a surviving spouse may experience after their husband or wife dies.
The good news is that couples can plan for many of these changes before they happen.
What Is the Widow’s Penalty?
The widow’s penalty describes the potential financial disadvantage a surviving spouse can experience after the death of their spouse.
One of the biggest reasons is that household income may decrease more than household expenses.
For example, imagine a retired couple receiving:
- $3,000 per month in Social Security for one spouse
- $2,000 per month in Social Security for the other spouse
- $5,000 total per month in Social Security benefits
After one spouse dies, the surviving spouse generally won’t continue receiving both Social Security checks. Depending on their circumstances, they may be eligible for a survivor benefit based on the deceased spouse’s record. In a simple example, the surviving spouse might receive $3,000 per month rather than the couple’s previous $5,000.
That’s a $2,000 monthly reduction in Social Security income.
But the mortgage payment didn’t necessarily decrease. Property taxes didn’t get cut in half. Homeowners insurance, utilities and home maintenance costs may remain largely unchanged.
That difference between reduced income and relatively stable expenses is one of the reasons the widow’s penalty can create financial stress.
Why Can the Widow’s Penalty Be So Significant?
The financial impact of losing a spouse usually isn’t caused by just one change. Several changes can happen at the same time.
1. Social Security Income May Change
For many retired couples, Social Security is an important source of retirement income.
When one spouse dies, the surviving spouse generally does not continue receiving both spouses’ full retirement benefits. Depending on eligibility and the circumstances, the survivor may receive a survivor benefit, but one of the household’s Social Security income streams typically disappears.
This is why couples should understand their Social Security survivor benefits before retirement.
The question isn’t only:
“How much Social Security will we receive while we’re both alive?”
It should also be:
“How much Social Security would remain if one of us passed away?”
That distinction can make a significant difference when evaluating whether a retirement plan is designed to protect the surviving spouse.
2. Pension Income May Change
Pensions can also create an important consideration for surviving spouses.
Depending on the pension plan and the payment option selected at retirement, pension income may:
- Continue to the surviving spouse
- Continue at a reduced percentage
- End when the original pension recipient dies
For example, a retiree may have a choice between receiving a larger monthly pension for their lifetime or selecting a joint-and-survivor option that provides continued income to their spouse.
There isn’t necessarily one right choice for every couple. However, it’s important to understand the trade-off before making an election.
A pension decision shouldn’t only be based on how much income you can receive today. It should also consider what happens to your spouse if you’re the first to die.
3. Many Expenses Don’t Decrease by 50%
One common misconception is that if a household goes from two people to one, expenses will automatically fall by half.
That’s rarely the case.
Some expenses may decrease. You may spend less on groceries, travel or entertainment. But many of the largest household expenses don’t change significantly based on the number of people living in the home.
The surviving spouse may still have:
- Mortgage or rent payments
- Property taxes
- Homeowners insurance
- Utilities
- Home maintenance and repairs
- Vehicle expenses
- Healthcare costs
- Insurance premiums
- Other recurring household bills
This means a surviving spouse could be dealing with substantially less income while still paying many of the same bills.
4. Taxes Can Change
Taxes are another important part of the widow’s penalty.
While married, many couples file taxes as married filing jointly. After a spouse dies, the surviving spouse may eventually need to file as a single taxpayer, depending on their circumstances.
That can create a very different tax situation.
The surviving spouse may have less total household income but still face different tax brackets, deductions and income thresholds. Retirement income from pensions, traditional IRAs, 401(k)s and other accounts can also become more significant when there is only one taxpayer.
For retirees, these income levels can affect more than federal income taxes. They can also play a role in the taxation of Social Security benefits and Medicare-related costs.
This is one reason it’s valuable to look at your retirement plan from both perspectives:
What does our tax situation look like while we’re married, and what could it look like if one of us eventually files as a single taxpayer?
Depending on your circumstances, strategies such as Roth conversions or managing withdrawals from different account types may be worth discussing with your financial and tax professionals.
Healthcare Costs Can Change, Too
Healthcare is another area couples should consider when planning for the possibility of one spouse passing away.
If you’re both enrolled in Medicare, you’ll want to understand the individual costs associated with:
- Medicare premiums
- Medicare Advantage or supplemental coverage
- Prescription drug coverage
- Out-of-pocket healthcare expenses
Income changes can also affect certain Medicare-related costs.
For couples who haven’t reached Medicare age, health insurance can be an even bigger consideration. If one spouse receives health coverage through an employer, what happens to that coverage if that spouse dies?
It’s important to understand what options the surviving spouse would have and what replacement coverage could cost.
Healthcare planning should also go beyond insurance.
Many couples naturally assume they’ll take care of each other as they grow older. One spouse may drive the other to appointments, help around the house, manage medications or eventually provide hands-on care.
If that spouse dies first, the surviving spouse may need to pay for services they previously provided for one another.
That could include:
- Transportation
- Home maintenance
- Housekeeping
- In-home care
- Long-term care
A strong retirement plan should consider not only how much money a surviving spouse may need, but also what resources would be available if their care needs change.
The Importance of a Survivor’s Financial Plan
One of the most valuable steps couples can take is to create a survivor’s financial plan before they need it.
This means looking at your retirement plan through the lens of one spouse rather than only as a couple.
Ask questions such as:
What income would remain?
Go through every income source and determine what happens if either spouse dies.
- What Social Security benefits would remain?
- Would pension income continue?
- If so, at what percentage?
- What retirement accounts would be available?
- Would life insurance provide additional resources?
- What other income sources would change?
What expenses would remain?
Next, look at what the surviving spouse would still need to pay.
Don’t assume expenses will simply be cut in half.
Consider housing, property taxes, insurance, utilities, healthcare, transportation, home maintenance and other recurring expenses.
What would the tax situation look like?
Consider how the surviving spouse’s tax situation could change.
Would they eventually file as a single taxpayer? How much taxable retirement income would they have? Could Required Minimum Distributions create additional taxable income?
These are questions that may be worth addressing while both spouses are still able to make decisions together.
Does your spouse know how everything works?
This may be one of the most overlooked parts of financial planning.
In many households, one spouse naturally takes the lead on the finances. They may be the person who:
- Pays the bills
- Manages investments
- Handles tax documents
- Works with the financial advisor
- Keeps track of insurance
- Knows where important documents are
If that spouse dies first, the surviving spouse may suddenly be responsible for all of these things while also dealing with grief.
Both spouses should have a basic understanding of the household finances and know where important information is located.
Review Beneficiaries and Estate Planning Documents
A survivor’s plan shouldn’t stop with income and expenses.
Couples should also periodically review their:
- Retirement account beneficiaries
- Life insurance beneficiaries
- Bank and investment account ownership
- Estate planning documents
- Powers of attorney
- Other important financial and legal documents
Keeping these items organized and up to date can help reduce the number of decisions a surviving spouse has to make during an already difficult time.
The goal isn’t to eliminate every financial challenge. It’s to eliminate as many unnecessary questions and loose ends as possible.
Planning for the Widow’s Penalty Is About Protecting Each Other
No one wants to imagine losing their spouse.
But planning for that possibility isn’t about expecting something bad to happen. It’s about making sure the person you love has a financial plan that can continue working if you’re no longer there.
You’ve spent years building a life together, raising a family, saving for retirement and making financial decisions as a team.
A retirement plan should account for both spouses living a long life together—and for the possibility that one spouse may eventually have to carry on alone.
That’s why one of the most important questions couples can ask is:
“If one of us isn’t here someday, will the other person be okay?”
If the answer isn’t as clear as you’d like, that’s an opportunity to start planning while you still have time and choices.
At Buska Retirement Solutions, we help couples look beyond whether their retirement plan works today and consider how it may work if there is eventually only one spouse.
By looking at income, expenses, taxes, healthcare and other potential changes, you can identify gaps and make informed decisions before a difficult situation forces you to.
The goal isn’t to plan for the worst. It’s to make sure the person left behind has a plan for the rest of their life.
Want to Hear More About the Widow’s Penalty?
The widow’s penalty is an important part of retirement planning, but it can be difficult to know where to start. That’s why we’re taking a deeper look at this topic on Financially Speaking.
In this episode, our Vice President and Private Wealth Advisor, Kailey Berendsen, will discuss what can happen to a surviving spouse’s income, expenses, taxes, Social Security, healthcare costs and overall financial plan—and why planning ahead can make such a difference.
Listen to Financially Speaking: “The Widow’s Penalty: What Happens to Your Finances When a Spouse Dies?”
You can listen to the episode on YouTube, Spotify, Apple Podcasts and Amazon Music.
This article is for educational purposes only and is not intended to provide individualized tax, legal or investment advice. Social Security, tax and Medicare rules are subject to change and individual circumstances vary. Consult with qualified professionals regarding your specific situation.