Widow(er)s have to plan twice for retirement!
Many widow(er)s have to initially plan for their early retirement and then again for
their final retirement.
Let’s assume for this example that both spouses earned about
the same inflation adjusted average $60,000 a year. If the widow(er) retires early at
age 62 they will get 81.33% of their spouses benefit, their survivor benefit. When
they turn 70 they can switch to 132% of their own benefit.
Note that the amount of additional taxable income before the 46.25% tax hump starts
is lower after their Social Security benefits increases. If they have made
investments in taxable fixed income sources like annuities and they are suddenly
faced with the MRDs (Minimum Required Distributions) from the traditional IRAs, they
could find themselves deeply into The Hump tax situation.
One possible solution
We gave an example on the “It Only Gets Worse!” page where you are pushed into the
46.25% Tax Hump when your SS benefits, other taxable income, and tax bracket all
increase by 25% while the taxability point of your benefits remains constant. This
would not happen if your other taxable income remained the same, but of course your
standard of living would have to decrease.
One way to solve this problem by using a Roth account as a source of additional tax
Let’s double the $100,000 fixed incomes from the “Annuity” page and use that in
conjunction with the $32,263 target for maximum Taxable income after age 70. Let’s
also assume that you are getting an annual pension of $8,000 a year. This leaves you
with a $24,263 target for your secondary source of taxable income.
You would stay within your target limit if you early retire at 62 and wait until age
68 before starting your annuity. During the 6 years of waiting, your taxable income
would be limited to your $8,000 pension which would allow you to convert $27,191 of
your IRA into Roth each year without crossing into the 46.25% bracket.
This of course would require a large dip into your other savings, but the end result
would be a relatively guaranteed flow of income during retirement back up by an
additional $163,146 in your tax free Roth account.