The death of a spouse creates a difficult transition in any person's life. The emotional effects can be devastating while the financial impact of each can be equally debilitating. Most women outlive their husbands by several years. Additionally, it is no secret that women face more difficult retirements than men. A myriad of factors, including longer life spans, earnings disparity, and interrupted work years for maternity have all contributed to this reality. In fact, the Social Security Administration reports that nearly 20% of unmarried women age 65 or older live below the poverty line, compared with 5% of married elderly women. Given that, it is important for widows to identify all potential sources of income that they may have at their disposal when they need it most.
Social Security
When an individual pays Social Security taxes, what they are doing, in effect, is earning "credits" toward their future benefits. The longer you work and larger your income during your working years, the higher your benefit. Many women take time off of work to have children and raise families, while some return to the work force, others do not. In both circumstances, some women may fall short of earning enough of the "credits" to qualify for higher retirement benefits. Consequently, women's social security incomes are often much less than that of their husbands.
Individuals (regardless of sex) that qualify for Social Security retirement benefits have a choice: they can claim their benefits either as a spouse or a worker. This feature may offer women a great advantage. For a spouse who has never worked a "paid job" or for one who has earned insufficient credits to qualify for their own "worker" benefit, they are eligible to receive 50% of the eligible worker spouse's full benefit. This is known as the "spousal benefit". Or, if you have worked but your spouse's benefit is higher than yours, then you can claim the aforementioned spousal benefit.
For widows that have lost their husbands, the wife can receive her own worker benefit or 100% of the husband's benefit, whichever is greater. A surviving spouse who has reached full retirement age (65 to 67 depending on birth year) is eligible for full benefits. Reduced benefits (roughly 72% of the full benefit amount) are also available for a surviving spouse as early as age 60. However, starting in 2005, the age at which the 100% widow's benefit is payable will be gradually increased to age 66 by 2011 and age 67 in 2029. Widows with minor or disabled children qualify for more benefits, but it that discussion is beyond the scope of this article.
A word of warning, if you remarry before age 60, you cannot receive widow's benefits as long as that marriage is in effect. If you remarry after age 60, you will continue to receive your (husband's) benefits.
Employer Retirement Accounts
Defined Contribution Plans
Retirement benefits, for many couples today, are often the most substantial assets in the marital estate. This asset can play an integral role in the life of both a widow and divorcee.
The distribution options available for employer sponsored qualified plans may vary. While some plans allow for the beneficiaries to receive distributions over time (like in the survivor annuity options to be discussed in the next section), others may be forced to pay distributions to the surviving spouse all at once. The spouse, however, can roll over the entire distribution into her own plan, unless the distribution is not an eligible rollover distribution for some other reason (ie. to the extent it is a required distribution).
Defined Benefit Plans
Defined benefit plans provide monthly income for the life of the participant. Traditionally, pension plan benefits were paid to the retired worker upon separation from service as a single life annuity. Upon the workers death, benefits would stop; leaving many surviving spouses (mostly women) without that stream of income.
In 1984, ERISA updated its joint-and-survivor law and made the 50% joint-and-survivor benefit the standard benefit for married individuals, whereby 50% of your monthly annuity would be paid to your annuity beneficiary upon your death. In the past, the retiree could choose to provide survivor benefits; however, under the revised law, written consent of the spouse is needed to decline the 50% joint-and-survivor benefit.
Many plans offer 50% and 100% percent joint-and-survivor options. The 100% joint and survivor option is a type of annuity takes into account the combined life expectancy of the worker and the spouse, and often is paid out over a longer period of time, the worker's monthly pension payment is usually less than it would have been if the worker and the spouse had declined the survivor benefit. So, under the 100% percent option, the joint benefit is reduced more than under the 50% percent option, but there is no reduction in benefits after the retiree dies, that is, the surviving spouse receives 100% of the joint benefit.
Another factor to consider is the fact that many workers nowadays change careers and/or employers several times throughout their working years. Oftentimes, employees may find themselves vested in pension plans unbeknownst to them (or their spouse). Surviving spouses are encouraged to inquire about any pension benefits due to them at both existing and previous employers where their husbands have worked.
IRA's
The cash flow options under the IRA rules depend on the type of beneficiary identified in the account. Surviving spouses have the greatest flexibility in terms of their distribution options.
Inheriting an IRA from a spouse gives you flexibility not available to other beneficiaries. You can put the IRA in your name or you can roll over the funds into an IRA you have already set up. The IRS will treat this as if the inherited IRA assets were yours all along.
Assuming that you are younger than 70 ½, as a spouse not only are you not required to take any distributions from the inherited money, but it also means that you can make additional contributions to the IRA (assuming you qualify). Converting the IRA into your name will also allow you determine your own beneficiary.
For surviving spouses who are younger than 59 ½ and depend on the income from the IRA for survival, leaving the IRA in your spouse's name is the best option. It allows you to take distributions without incurring a 10% early withdrawal penalty. But, because the IRA remains in your deceased spouse's name, the future beneficiaries cannot be changed.
As a spousal heir, one of the flexibilities of an inherited IRA is that you can split the account. So, let's say you needed some current income from the account (which you will be forced to take for the rest of your life), but don't want to exhaust the whole account, you can split the inherited account into one that generates income (stays in deceased spouse's name) and the other (converted to your own IRA account) to grow, deferring distributions until your RMD age.
Insurance Policies
Life insurance proceeds can be one of the single biggest financial benefits for a survivor beneficiary. The obvious beneficiary of a life insurance policy is likely to be a surviving spouse (and children, if applicable), whether directly or through a trust. Most life insurance policies are purchased outright by the individuals. But, life insurance benefits are also often available through employers. Widows should check with the decedent's employer, previous employers, mortgage lenders, professional organizations and unions to ensure that they claim any benefits owed to them.
In summary, when it comes to money matters, all options and resources must be carefully considered. Any woman dealing with the harsh reality of a husband's death is well advised to seek professional guidance. In addition to their financial planner, legal advice from an estate planning attorney to help them assess their needs and the most appropriate distribution strategies going forward. The right decisions and proper planning can make a world of difference in your financial survival.
Sources: Institute for Women's Policy Research; U.S. Department of Labor; and the Social Security Administration
