Neil Sedaka once sang ‘Breaking up is hard to do’ — but is it any easier when you’re older and wiser?
You see, divorcing later in life, known by a number of different names (gray divorce, diamond divorce, or even silver splitter), is more common and acceptable than it was for generations past. In fact, according to the Pew Research Center, every 10 out of 1,000 couples aged 50 and over got divorced in 2015, which was double what their divorce rate had been in 1990. And for those over 65, the increase was even higher — it had roughly tripled in 25 years. In fact, while the overall rate of divorce has continually declined since then, the divorce rate of people over 50 is increasing.
The rise of gray divorce might be attributed to a variety of things: people are living longer, both spouses are working and are therefore becoming more financially independent, and the stigma associated with divorce has shifted significantly. I find that divorce often creates financial stress regardless of your age but divorcing later in life comes with a new set of challenges.
I had this discussion recently with a client of mine, I’ll call her Susan. Both she and her husband George are their late 50’s, and I have been working with them for almost a decade. Susan called me to tell me that she and George were separated and about to file for divorce. To avoid any conflicts, we agreed that we need to have a larger discussion about how they will split up their assets, but for now she was just looking for general guidance on how the divorce will affect their finances. I’d like to take our time this week to review some of the things I shared with her, things that “gray” divorcees need to consider as they part ways.
Now, no two marriages or circumstances are the same and every divorce will require a unique set of compromises. A divorce later in life will affect others, too. Loved ones are often shocked when a couple divorces later in life. Adult children can get dragged into late-in-life divorces and be asked to side with one parent or the other, and that can hurt the family unit. This is often exactly the reason why unhappy couples wait to split until after their children have grown up.
The couple involved is not only facing family stress but is also usually concerned about how they will catch up with retirement savings and become independent after many years of marriage. The retirement they envisioned for their future together quickly falls away to reveal a starker reality. The income coming in may no longer be sufficient to support two households.
I explained to Susan that the goal here should almost always be an equitable distribution of assets. For example, we need to consider the division of retirement benefits, beneficiaries on their various accounts and investments, health insurance and Medicare benefits, healthcare expenses overall, and support obligations such as alimony. Additionally, sometimes a financially dependent spouse may feel they need more support given the reduced likelihood of starting a career late in life, and a financially supporting spouse may be worried about their ability to keep up support payments as they slow down or retire.
Some of the most common concerns we see in these situations are things like whether or not there will be enough income for two households; concerns about healthcare spending; if or how it’s necessary to downsize; concerns about achieving financial independence and making their income last for life – for both ex-spouses.
And the need for retirement benefits becomes more critical when you divorce later in life because you’ll have less time to “make up” any losses you may experience due to divorce. Understanding what benefits are available, and how they can be distributed, is crucial as you plan for a separate future.
Susan and I spoke about four important financial areas I recommend a divorcing couple consider before finalizing the paperwork.
First, consider all of your income sources and how you can maximize them. Next, plan for your Social Security benefits and the optimal time for either spouse to file. Remember, non-working spouses can claim up to 50% of the working spouse’s benefit. Third, don’t overlook important retirement assets such as a pension or annuity. These provide guaranteed lifetime income that can be an invaluable part of your retirement income plan. Lastly, consider which assets could be liquidated without penalty as part of the “great divide”. Some retirement plan assets can be split without penalty. A misstep here could create a significant tax penalty.
For example, you can divide up a qualified retirement plan such as a 401k or 403b. The non-employee spouse can elect to take cash out in a Qualified Domestic Relations Order (QDRO) under IRS rule 72t(c), without incurring an early IRS withdrawal penalty of 10%. The kicker here is that you still have to ordinary income taxes on the distribution. These funds could then be used for any purpose, such as paying bills, paying off debts, creating an emergency fund, making a down payment on purchase of a home, etc.
You might also consider taking out a loan from a qualified retirement account, which allows you access to money in the plan without taking a permanent distribution, thus avoiding taxes and early withdrawal penalties. You can usually borrow up to 50% of the vested account balance or a maximum of $50,000, whichever is less.
Folks, divorce at any age can be stressful, and even downright scary for some. But there is a “silver” lining – research indicates that many undergoing later-life divorces are seeking opportunities to pursue their own interests and independence for the remaining years of their lives. This can lead to a renewed sense of optimism they may have been lacking, which can make the process ultimately worthwhile.
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield.
Jeff can be reached at jeff@cutterfinancialgroup.com. Insurance products, including annuities, are offered through Cutterinsure, Inc., (MA insurance license #2080572). Cutter Financial Group and Cutterinsure are affiliated and under common control but offer services separately. Members of Cutter Financial Group’s management receive revenue directly from Cutterinsure. Any compensation received is separate from and does not offset regular advisory fees. Cutter Financial Group does not charge advisory fees on any insurance products. We do not offer tax or legal advice. Always consult with qualified tax/legal professionals regarding your own situation. Investing in securities involves risk, including possible loss of principal. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Market data and other cited or linked-to content in this article is based on generally available information and is believed to be reliable. Please contact us to request a free copy of Cutter Financials’ Form CRS, Form ADV 2A and applicable Form ADV 2Bs.
