76% of widows participating in a recent study were under age 60. (Modern Widows Club Impact Study 2020)
I don’t know about you, but this statistic doesn’t fit my mental image of a widow. I think of the nice, older ladies from church when I was a kid, not someone in their 50s. (To be fair, I had no concept of age as a kid, so the women I’m thinking of might have been in their 50s at the time.) Regardless, the average age of widowhood in the US is 59 according to the US Census Bureau, meaning that a larger number of widows are in their 50s, not their 80s.
Given this reality, it’s more important than ever to be aware of the financial pitfalls that can arise in the wake of losing a partner. In my years of advising clients, I’ve seen firsthand how a few costly mistakes can compromise long-term financial security. Today, I’m going to share the three most expensive financial errors I commonly encounter among the newly widowed. My goal here isn’t to pass judgment — it’s to empower you with the knowledge to avoid these pitfalls. In some cases, these mistakes can even be traced back to advisors who might not fully appreciate the unique challenges that come with widowhood.
With that said, here are the most common issues faced by new widows and strategies to successfully navigate them.
Inherited IRA vs Spousal IRA
One area that frequently confuses the newly widowed is the treatment of retirement accounts, particularly the difference between an inherited IRA and a spousal IRA. When a spouse passes away, I often see well-meaning advisors automatically retitle the account in the name of the surviving spouse. In most cases, this IS the best option, but when it’s not…it can come with unintended consequences.
First, what does it mean to retitle an IRA? Essentially, the surviving spouse can treat the inherited IRA as their own. They don’t have to worry about Inherited Required Minimum Distributions, instead they can simply follow the Required Minimum Distributions based on their age. This often provides flexibility, as RMDs are spread over a lifetime, not a 10-year RMD period.
So, when is simply retitling an IRA a problem?
When the surviving spouse is under 59.5 and might need access to the funds in that account. If the surviving spouse is under 59.5 and they’ve retitled the IRA, they’ll pay a 10% early withdrawal penalty plus income tax on the withdrawal. This often comes up when the surviving spouse is in their mid or late 50s, but not quite to 59.5.
The Strategy
Split the difference. A surviving spouse can roll their spouse’s IRA into an Inherited IRA first, then retitle the account in their name once they reach 59.5.
The benefit to this strategy is that the surviving spouse can access the funds immediately, without penalty. They will have to take Required Minimum Distributions during this period, but that’s the tradeoff for the increased flexibility. Once they turn 59.5, they can retitle the account in their own name and delay any further RMDs until their own RMDs begin at 73.
Timing of Widows’ Social Security Benefits
Widows (and widowers) have a special option when it comes to claiming Social Security. Instead of taking Social Security at 62, widows can begin taking Social Security survivor benefits at age 60 (or 50 with a disability). Additionally, surviving spouses can independently claim either their retirement benefit or their survivor’s benefits.
Since surviving spouses can claim the benefits independently, this means that they can claim one while allowing the second to grow. This used to be an option for everyone, but the law changed in 2015. Now, Social Security defaults to the higher of one’s individual or spousal benefit.
It’s easier to provide an example on this one.
Jane is 59 and a recent widow. She turns 60 in February. Her late husband was 65.
Jane’s Social Security will be $2700 per month at her Full Retirement Age of 67. Her husband waited to begin collecting, however his full benefit would have also been $2700 at 67.
Jane’s optimal strategy is to begin collecting her survivor’s benefit at 60, then switching to her own benefit at age 70. Here’s a graph showing the difference between this (Hybrid Approach in purple) and other strategies. You can see that the hybrid approach provides nearly 1/3 more income over the course of her lifetime.
Finding Lost Life Insurance Policies
There are a surprising number of life insurance policies that go unclaimed because the beneficiaries don’t know about them, or they can’t locate the policy documents. Thankfully, the National Association for Insurance Commissioners has a tool for finding insurance policies.
To use it, visit this site.
To complete the request, you’ll need to have the following information for the deceased:
Social Security Number
First and Last Name
Date of Birth
Date of Death
Veteran Status
Your relationship to the deceased
Navigating the financial landscape after the loss of a spouse is never easy. The decisions you make during this time can have lasting impacts on your financial health and quality of life. By understanding the differences between an inherited IRA and a spousal IRA, carefully planning the timing of your Social Security benefits, and diligently tracking down all life insurance policies, you can avoid some of the most costly pitfalls.
Remember, this isn’t about making hasty decisions in the midst of grief—it’s about empowering yourself with information.
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