Divorce can happen at any stage in life, and each stage brings its own special set of challenges. Divorcing young with a family creates years of financial obligations and working with a former spouse on parenting for many years. Divorcing midlife with the children nearly grown shifts the burden to going back to work for some parents. And divorcing closer to retirement poses some of the most significant challenges to finances.
As spouses approach retirement, divorce hurts financially because of the singular reality of low-or-no-employment and fixed-income scenarios. The odds that each spouse will continue to work diminish greatly, and if one has not worked in some time, the chance of any truly gainful employment is low. So, if these spouses decide to divorce, they are looking at a zero-sum game: no chance for growing new employment or reaping the rewards of future investments. The net worth of the couple will probably not get any higher, nor the earning capacity.
At the same time, the cost of living for post-retirement individuals expands, particularly as a share of gross income. The chance of illness creating a large healthcare debt increases while the chance of landing affordable long-term care insurance decreases. Medications can be costly, and private insurance to cover what Medicare will not is yet another expense.
Given these realities, when spouses at this age do decide to divorce, they suffer financially because two people living together in one household can do much more on the same funds than two people in two separate households. As a result, both spouses see a decrease in their standard of living because they are taking the net worth, splitting it, and using it to sustain two separate lives. It is as if you just took your annual income and cut it in half. The lesser-earning spouse, i.e. the one with fewer benefits or prospects, cannot hope for spousal support from the other spouse if that spouse suffers from the same constraints.
So, what mistakes should be avoided when divorcing over the age of 50?
1. Forgetting About Health Insurance
Forgetting about health insurance can leave you without coverage, strain your finances, and deplete your retirement funds. Having no insurance will also result in limited access to care. Not to mention, obtaining coverage will be more challenging and expensive, especially if you develop health issues after losing insurance.
What about COBRA? If you were previously covered by your spouse’s employer-provided health insurance plan, you will have the right to continue coverage for a set period after the divorce (at a higher cost). Therefore, it is important to pay attention to related deadlines. Other options that you can pursue include your own employer’s insurance or signing up for the state’s healthcare exchange under the Affordable Care Act.
2. Keeping the Marital Home
Keeping the marital home may not be the best financial choice post-divorce. Doing so will possibly preclude other important needs and finances, such as a sound retirement plan. In addition to expenses such as the monthly mortgage and real estate taxes, keeping the house also involves unexpected overhead expenses related to upkeep and replacement. This is especially true for a house that you have lived in for more than fifteen years. Therefore, it is best to talk to your divorce attorney and your financial advisor about the responsibilities and implications of keeping the house.
3. Not Considering the Potential Tax Consequences
Many financial decisions made during a divorce have tax implications. For instance, if you divide the assets without considering their tax consequences, you may face unexpected capital gains taxes or other tax liabilities and penalties. The opposite is also true, as failing to optimize tax allocation may also mean losing out on certain valuable tax benefits, such as credits, deductions, and exemptions offered to divorced individuals. Moreover, simply ignoring tax implications may also impact the value of your retirement assets and impact your ability to live a comfortable retirement.
4. Forgetting About Joint Debt
Forgetting about joint debt liabilities can result in unnecessary financial strain, credit damage, financial stress, legal consequences, and, in extreme cases, seizure of assets. Your credit score will also be impacted in case of non-payment, and there may be legal disputes and potential court actions as well.
5. Ignoring Future Pension Value
Ignoring the value of a future pension can result in inadequate savings for retirement and an additional retirement account. It also ignores a monthly check that can provide you with financial flexibility to meet unexpected finances post-divorce. Worse, by failing to consider a future pension value you may have to delay your retirement if you realize post-divorce that your pension is insufficient to allow a comfortable retirement. If you are the nonemployee spouse, consider receiving your marital share of your spouse’s future benefit, or having someone calculate the present value of the pension so you can offset it with other marital property.
6. Failing to Plan for the Division of Retirement Assets
Moving assets from a spouse’s 401k, IRA, or other retirement plan into a different account takes planning and paperwork. Get advice before doing so. Also, remember that using these funds before the age of 59 ½ will have you paying the 10% early withdrawal penalty. Discuss with your divorce attorney how to manage and protect your family’s retirement assets through a Qualified Domestic Relations order (QDRO). In that case, it will allow you to make a withdrawal from your ex’s 401(k) or 403(b) without paying the 10% tax penalty.
7. Hiding Marital Assets
In a divorce, where particularly a lot of money is at stake, a spouse might be tempted to hide, relocate, or even devalue marital assets. However, when the truth emerges, that spouse might be in for some real legal trouble. Repercussions for hiding or devaluing assets include giving your spouse additional assets (i.e., inequitable distribution of property due to marital misconduct), attorney’s fees, or contempt of court rulings.
8. Completing an Inaccurate Statement of Income and Expenses
Household expenses can change drastically when the same income is suddenly needed to run two households instead of one. When this happens, completing an inaccurate Statement of Income and Expenses can create problems. Essential costs such as mortgage or rent, utilities, auto expenses, insurance, groceries, etc. can become a struggle to cover. As a result, there will be budgeting issues, and eventually, debt will accumulate.
9. Forgetting to Update Your Beneficiaries and Estate Plan
Failing to update your beneficiaries and estate plan can result in unintended consequences. For instance, your financial assets and even life insurance policies will still have your ex-spouse designated as the beneficiary. If you pass away, your heirs will need to fix this unintended problem so your assets will go to your intended beneficiaries. This will result in property ownership confusion, estate tax issues, and other legal problems. For this reason, you must update your beneficiaries and estate plan as soon as possible after your divorce is over.
10. Settling Fast without Receiving Your Fair Share
Getting through the divorce proceedings as quickly as possible may seem wise, but settling without your fair share is not. For this reason, it is important to secure your fair share of the marital property to avoid leading a financially difficult life during your post-divorce retirement years. Moreover, without having your fair share of marital funds, you may also have difficulty covering your monthly living expenses. As a result, you may have to delay your retirement, live a lesser lifestyle, or become financially dependent on others.
Should you need the assistance of an experienced divorce attorney in Creve Coeur and O’Fallon or have questions about your divorce situation, know that we are here to help and ready to discuss those questions with you.