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Don’t Let a Late-Life Divorce Ruin Your Retirement Plans

Janna Herron
Don’t Let a Late-Life Divorce Ruin Your Retirement Plans

Divorce not only can hurt the heart, but also the wallet. The financial fallout can be even worse for those who divorce later in life as carefully managed retirement plans quickly unravel.

So-called gray or late-life divorces have steadily risen since 1990. The divorce rate among those between 55 and 64 has more than doubled, while the rate among couples 65 and older has tripled. Overall, about one in four couples over 50 divorce.

That has some serious financial implications, especially for women. More than a quarter of women who went through a gray divorce fell into poverty, versus 11 percent of gray divorced men. Expectations for a comfortable retirement have to be adjusted when couples split near or during their golden years.

“The basic problem is that whatever a couple may have counted on for retirement is now 50 percent less,” says Chris Chen, a wealth strategist at Insight Financial Strategists in Waltham, Mass. “This puts into question whatever assumptions existed before. The couple must now, more than ever do some serious financial planning.”

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Right-size expectations. Married couples share many expenses like housing costs, but once divorced each spouse must pay for their own expenses. Chen says that on average it costs 25 percent more for the couple to run two separate households instead of one. “There is rarely 25 percent more in resources,” he says.

Newly divorced couples may want to reduce or eliminate contributions to retirement plans to pay for these new costs. But this only jeopardizes a more secure future.

“Most people will need to lower their lifestyle expectations,” says Niv Persaud, managing director of Transition Planning & Guidance in Atlanta. “It’s important each person takes time to estimate how much their post-divorce life will cost.”

Consider working longer. “Those who divorce after age 50 may need to stay in the workforce longer than originally planned,” says Barbara Shapiro, president of HMS Financial Group in Dedham, Massachusetts. “We often recommend that our older clients keep working as long as possible to pay for their on-going expenses and build up their savings for the day that they can no longer work.”

Related: Why Carrying a Mortgage in Retirement Can Really Pay Off

That means that some spouses will be entering the workforce for the first time or after many years out for the office. This can affect how much they can earn and create an even further stressful situation on top of the divorce as the spouse tries to re-acclimate to the workplace.

Don’t get trapped in the family home. The best option for both individuals is likely to sell the home they once shared. Likely, the couple has owned the home for a long time and have built up equity that can be tapped for retirement. Trying to keep the family home may become too expensive for one person to maintain.

“Far too often I have seen one divorcing member, usually the woman hold on to the home after a divorce when she cannot comfortably afford it,” says Scot Hanson, a financial advisor at EFS Advisors by Shoreview, Minnesota. “To keep the house, she starts premature IRA distributions and pays penalties and taxes. Contributions to 401ks and Roth IRAs stop. Retirement funds are depleted instead of growing. It can be very sad.”

If the divorcee is forced to sell the home post-divorce, that can trigger a large capital gain tax that wasn’t anticipated pre-divorce, says Douglas Lyons of Doug J. Lyons Financial Group in Red Banks, New Jersey. But by selling the home as part of the divorce, the couple each can use their $250,000 capital gain exclusion for a total of $500,000 and potentially eliminate or mitigate the impact of capital gains from the sale.

Get steady income. “Pensions and Social Security are considered the safer streams of income and are an important part of your plan after divorce,” says Michelle Buonincontri, a certified financial planner at Sensible Money in Anthem, Arizona, “as they increase the likelihood of successfully meeting your needs in retirement.”

Related: What Your Retirement Savings Should Look Like at Age 50

If you were married more than 10 years and over 62, you are eligible to collect retirement benefits on your former spouse’s benefits as long as you remain unmarried. The recent change to the file-and-suspend rules for Social Security doesn’t affect divorced spouses. That means ex-spouses can continue to receive benefits even if the other spouse voluntarily suspended retirement benefits.

If one spouse has a pension, the other needs a qualified domestic relations, or QDRO, as part of the divorce settlement to have a legal right to get a certain percentage of the pension payout. That money then can be rolled over into an IRA. This provides a tax protection for pension beneficiary, who would otherwise be taxed on the distribution without the QDRO.

Protect your alimony. The individual who receives alimony as part of the divorce settlement needs to plan for the possibility or death or disability by the person who pays the alimony, says Lyons. Life insurance is one option, which protects the income from the alimony provider. A cheaper option is divorce disability insurance, which only replaced the alimony payment for as long as the divorce settlement dictates.

Take stock of all assets. “Know that all marital assets can become potential retirement assets,” says Buonincontri. Consider more obscure employment benefits such as stock options, deferred compensation, bonuses, HSA accounts and the value of pensions (their future income stream) when splitting up assets in a divorce, so that each person gets an equitable share.

“If these assets aren't explicitly identified, or you don't understand them, the success of a retirement plan may be been compromised as there is no ‘re-do’ in divorce,” says Buonincontri.

But understand any risks that come with certain types of assets, says Jeffery Nauta, principal of Henrickson Nauta Wealth Advisors in Belmont, Minnesota. For example, one woman had agreed to let her soon-to-be ex-husband run his business, but she would get half of the proceeds when he sold it.

“He had promised he would sell it soon. That was five years ago and there have been no talks of selling it,” Nauta says. “The rub? He also keeps the cash flow off the business in the meantime.”

Take care of your health. If you divorce after age 65, then you can qualify for Medicare based on your own working record or your ex-spouse’s working record (as long as your spouse is 62). But if you (or your spouse) don’t qualify for Medicare, then you need to plan for health insurance as part of the divorce settlement. If you can get benefits through work, no problem. But if your benefits previously came through your spouse’s employer, check to see if you’re able to purchase coverage for yourself through that plan. Otherwise, consider a legal separation instead of a divorce to maintain health benefits until other arrangements can be made.

Get rid of debt. Don’t leave the marriage with a mountain of unpaid joint debt. Creditors can go after you if your name is on an account that your ex-spouse was supposed to pay per the divorce agreement. If you’re on manageable terms with your spouse as you go through the divorce, try to pay off joint debts before finalizing your split. Otherwise, share the joint debt by putting part into an account only in your name and the remaining on an account in your ex’s name. That way, each is responsible for only their part.

“Debt can be an issue in divorce at any life stage but a late-life divorce gives you less time to retire debt,” says Nauta. “You should always factor into the settlement a plan for paying off high-interest debt.”

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