In dollar terms, divorce is costly to anyone. Yet, for older Americans, the costs are steeper. When an older couple divorces – what has become known as a “gray” divorce – people often wonder, “Why?” If you have been married for so long, the kids have grown up, why separate now? While some gray divorces may involve first-time marriages, most gray divorces involve people on their second or third marriage. As you might imagine, a second divorce at or near retirement poses certain financial issues of pressing importance.
Here are a few of the biggest financial challenges facing older Americans who divorce, and tips for meeting them.
1. How can I rebuild my retirement after divorce?
This is the most common concern. The problem is a gray divorce can gut your retirement account, leaving you little or no time to rebuild. In a gray divorce, a married couple’s collective retirement savings may be redistributed into equitable shares, one for each spouse. That might not sound so bad, until you consider all the other expenses that come with divorce – finding a new home, finding new health insurance, paying lawyer fees, etc. Another concern, once one hits retirement age, one usually lives on a fixed income flowing from Social Security, investment income, and retirement accounts. Absent a prenuptial agreement, these income flows can become marital property. If you are the spouse with the majority of the fixed income, you want to protect it. If you are the spouse with less income, you want to claim the other spouse’s income. Because of the competing needs and the reality that the income is fixed, a great deal of financial planning should take place during the gray divorce.
Even if you are just getting divorced at 50, you must remember that it’s double the expense for pretty much everything as now the costs of one house are allocated between two houses. Consider this example. One spouse is a high-level executive. The other spouse is a stay-at-home parent. The high-level executive will most likely have to give half of his or her 401(k) to the other spouse and most likely must pay spousal support (maintenance). On paper, it may look like the high-level executive spouse makes a ton of money, but in reality, there’s not a lot left after paying your own monthly expenses plus spousal support. As the high-level executive spouse may not have funds available for securities investing, the top priority should be getting the retirement plan back on track as your employer is matching. That usually means maxing out everything you can for retirement savings by diverting as large of a share of monthly income that can be afforded into that divided 401(k). The high-level executive spouse may have to delay his or her own retirement by three to eight years to catch up for half of the 401(k) awarded to the other spouse at divorce.
2. Do I return to working full time?
This is another common concern. The stay-at-home parent/spouse is worried about how hard it will be to earn money after a divorce after not working full-time for years. A gray divorce can be especially daunting for an aging spouse who, decades earlier, gave up a career to raise a family. To determine if a return to the workforce is necessary, you need to figure out if you can live comfortably without returning to work, even if it means a tighter budget. A stay-at-home spouse in her 50s who has been married 20 to 30 years faces this problem when his or her spouse asks for a divorce. It is a lifestyle change when you go from living in your dream home, possibly as an empty nester, counting the years to a prosperous retirement. This is especially difficult when you haven’t worked in over 20 years. The gray divorce process forces you to realize that you will never find a job with a salary that approaches the one your spouse earned. You need to speak with a financial advisor to come up with a plan to determine if you must go back to work. It may require selling your dream home and living on a reduced budget to avoid going back to work.
3. Can I afford health insurance?
A common concern due to the age of the spouses is that medical costs or potential disability or long-term care could be a reality and a financial disaster. While Medicare will cover certain costs, it will not cover all costs. Both spouses should take care to have secondary health coverage and some form of long-term care insurance. Should one spouse become disabled, Social Security covers some level of lost income, but a private insurance policy would better serve your needs. In a gray divorce, these fears over the inability to be cared for in case of illness become quite stark, so you would want to negotiate that your higher-earning spouse take some measures to cover this risk through insurance.
4. What to do with the marital home?
In almost every divorce, you must decide what to do with the marital home. In a gray divorce, any marital home can feel like an asset − or a burden. To make this decision, consider all the costs of owning and maintaining the marital home before you decide who gets it − if anyone. For example, let’s say the house has $500,000 in equity and 10 years remaining on the mortgage. If the settlement awards the house to one spouse, then that spouse probably also inherits the mortgage payments, the property taxes, the insurance, and the maintenance. If the spouse elects to refinance the mortgage, that could mean giving up a loan with a historically low interest rate for a new one at 2024 rates which are over 2 times higher. The same issue arises if the divorcing spouses decide to sell the old home and buy two new ones. In a gray divorce, if the numbers don’t pan out that you can afford the monthly payment and upkeep, you should consider downsizing.
As you can see, the gray divorce poses many financial questions not ordinarily of immediate importance for younger couples, and the urgency of financial need combined with fixed incomes puts a premium on planning.
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.