Financial Impact on a Surviving Spouse
When a spouse passes away, there can be many impacts to their financial picture. The fact is a husband and wife almost never die at the same time. Although not always, statistically husbands are more likely to predecease their wives.
Household gross income could be cut by as much as 40%, while the impact of income tax can actually increase.
The emotional aspects of grief can be challenging enough without having to worry about being unprepared financially.
Changes in income
The changes in income after a spouse dies can be significant. Income could be reduced by as much as 40%.
- CPP: The surviving spouse may receive a Canada Pension Plan survivor benefit depending on age, the deceased’s CPP contributions and the age benefits were taken, and the survivor’s own CPP amount.
For example, a widow who is at least 65 could receive up to 60% of her deceased spouse’s CPP amount. But the total of her own CPP plus the survivor’s pension is capped at the maximum for a single person, currently $1,154.58.
- OAS: If a spouse dies at 65 or older his or her partner will no longer receive Old Age Security (current monthly payment $601.45).
If the survivor’s new income is above the OAS income-recovery threshold ($77,580 for 2019 income year) their own OAS could decrease or be entirely clawed back.
- GIS: If a family receives the Guaranteed Income Supplement, future payments will be based on the widowed status and income. However, a survivor with reduced income could qualify for GIS for the first time.
- Employer pension plans: The workplace pension plan may pay a survivor benefit, but they are not standardized.
With a defined-benefit pension, a survivor is typically entitled to 50 – 60% of the payment.
With a defined-contribution pension plan, the survivor payment depends on the option the departed spouse chose to generate their retirement income. Payments may continue if a life annuity with a joint and survivor option was purchased. If the funds were transferred to a life income fund (LIF), which is similar to a RRSP, and the surviving spouse is beneficiary, they are entitled to the fund assets. The LIF value may be paid in cash, transferred to a life income fund in the survivor’s name, or used to purchase a life annuity.
Extended health-care benefits or other perks may continue, be reduced or entirely eliminated. Check your employer pension plan documents to see what benefits the survivor is entitled to.
Expenses for a retiree living alone are about 80% of those for a couple.
Some household expenses will decrease, but not as much as you would expect. Rent or home ownership costs such as property taxes, home insurance and utilities will stay the same unless the survivor moves to less expensive accommodation. Vehicle operating costs won’t change substantially unless you dispose of a second vehicle.
Personal costs such as clothing, hobbies and medical care for the deceased will be gone. Grocery bills will be lower, but not 50% lower. Buying food in smaller quantities usually costs more.
Travel is a large budget item for many retirees. Expenses will decrease somewhat, but hotel rooms will cost about the same, and many tour companies levy a surcharge on single travellers.
A retiree who outlives their spouse can no longer benefit from tax breaks available to couples such as two basic income deductions and pension income-splitting. Certain tax credits such as the family caregiver amount are dropped.
Income from non-registered assets that were held jointly can no longer be split between both spouses.
If there was a RRIF with the spouse as successor beneficiary, those payments will increase the survivor’s taxable income when combined with their own.
The death of a retiree has clear financial implications for the surviving partner. This is often forgotten. Take a minute now to imagine what will happen next if you leave a spouse behind.
Proper planning during the investment draw-down years can help lessen reduced cash flow and an increase in income taxes. When doing your retirement planning calculate different scenarios with various ages.
For example, it might make sense to make withdrawals from your RRSP/RRIF at an earlier age to reduce the total amount.
Usually, either by choice or necessity, one spouse chooses and rebalances the investments, checks the statements and builds the spreadsheets, while the other – does not. You may have created a system that your spouse might not be able to maintain.
Personal finances, be it paying the bills, overseeing investments or keeping the household budget on track will be the surviving spouse’s responsibility alone.
Taking over the finances after years of low participation will leave your spouse vulnerable to confusion and indecision all while dealing with their grief and government forms, the funeral home and bank are all demanding their attention.
Now is the time for your spouse to learn how to manage your financial affairs. Carve out some time to discuss your finances and where all your documents are kept. Simplify as much as possible. Hold accounts jointly. Have a trusted financial advisor – whether a professional or experienced family member or friend – they can turn to for help.
Related: How to minimize probate fees
The bottom line
Mourning the loss of a spouse can be one of the most difficult things for a person to experience. No one is ever ready to lose a loved one.
I don’t believe there’s any way to truly prepare for the death of a partner. What I do believe is that – financially speaking – proper planning in advance may help ensure that finances may be one less concern during such a trying time.
Check out this Seniors Canada website for a list of provincial and national resources.