Surviving Gray Divorce
Divorce is always complicated, but the stakes are even higher when you are getting a so-called “gray divorce.” The divorce rate for people over 50 has doubled over the past decade. And many of them have been married for over 20 years. A big driving force is increasing life expectancy. Today, when you are 50 years old, it is easily conceivable that you will live for another 30, 40, or even 50 years. Even if your relationship with your spouse is decent, do you want another 30 years of the status quo? Or is it time for a change?
Marriages end for all kinds of reasons, including poor behavior, growing apart, boredom, and financial issues. But surviving a divorce after 50 comes with unique challenges:
Retirement Is Coming (or you’re in the thick of it)
Even if you had your retirement under control before you started pursuing a divorce, it is going to look a lot more uncertain after you are facing it. The prospect of losing a large chunk of your savings, perhaps even half of your retirement, can be a daunting realization.
The picture becomes even more complex because retirement assets are some of the most complicated to split during a divorce. Pensions, IRAs, and 401Ks all have different rules and requirements, as well as tax consequences and other complications.
Health Concerns Are at the Forefront
Additional health concerns occur when you are over 50. You may have already experienced them, and others are essential as preventative measures. Your medical expenses have likely increased, and you might even be considering long-term care. To understand what options you will have available to you after the divorce is over, you must be well-informed throughout the process.
You May Be Supporting Adult Children
Your children are probably adults if you are getting divorced later in life. However, they are still an important concern as you proceed through a divorce.
The pain of watching parents split is never easy, no matter how old you are. Your adult children may intellectually understand that all relationships do not last forever, but you must still keep them at the forefront of your concerns. The future of your relationship will depend on it.
In addition, even though your children may be in college or working full-time, you may be accustomed to providing for financial support for them (or your grandchildren). Although divorce may be inevitable, you should realize that every dollar you spend paying attorneys is less support that you may be able to provide your children in the future.
In the coming guide, I am going to walk you through the key issues in a grey divorce, as well as some helpful tips to keep you from making financial mistakes that could hurt you for the rest of your life.
4 Ways to Avoid Devastating Financial Mistakes that Could Derail Your Retirement
1) Choose the Right Method of Divorce
Divorce does not have to be a fight. The traditional litigation method may be the least effective way to split, so you should investigate two alternatives: mediation and collaborative divorce. If you are civil with your spouse, you should seriously consider these methods:
Mediation occurs when you hire a neutral third party, such as a retired judge, to help navigate all the issues in your divorce or resolve particular sticking points. In order for this third part to be the mediator, both you and your spouse have to agree on this person.
You can both still have attorneys help you navigate your wishes and negotiations, but the process is generally less formal and contentious. You, your spouse, the mediator, your attorneys, and any other advisors, such as a Certified Divorce Financial Analyst, sit in a conference room and knock out the key issues.
The downside to mediation is that the outcome is non-binding. If you do not come to a resolution, or if one of you changes your mind later, then the process could be waste of time and money. You will have to do your homework, think about the relationship with your spouse, and really consider if mediation will work for your situation.
Collaborative divorce is another method to seriously consider. It is structured on the premise that trying to fight and “win” is a poor way to resolve divorce. Collaborative divorce is actually a better idea than trying to sit down and solve problems. You and your spouse will work with a team of collaborative divorce professionals, and come up with a more amicable settlement (that is mutually beneficial).
At the outset of the collaborative divorce process, you, your spouse, your attorneys, and other advisors must commit to this process—in order to come to a resolution. If you do not, you may end up having to go to court. Then your attorneys and advisors have to resign from your case.
The goal is to come up with a peaceful resolution to your divorce without a fight, so there is a strong emphasis on mediation and negotiation.
Sometimes you have to litigate the divorce. In other words, you and your spouse hire different attorneys to represent your interests. If you do not come to a settlement out of court, a judge will decide those issues for you.
Although litigation is the most well-known kind of divorce, it is also the most expensive. Quite simply, litigation is a fight. In fact, the cost of litigation is directly proportional to the amount of acrimony you have with your spouse. The process can drag along for years, and oftentimes, the only winner is an attorney.
That said, perhaps you and your spouse do not get along. Or there is abuse or another issue that prevents you from using mediation or collaborative divorce. If so, litigation may be the best option for you.
Fighting is Expensive
There are many advantages to mediation or collaborative divorce, particularly when you are older. These processes are usually cheaper, faster, and less formal than the traditional route of litigation. Perhaps more importantly, using one of the alternative methods can help maintain a better long-term relationship with your soon-to-be ex-spouse and your children. The direct combat of litigation can end up bankrupting you, and it can leave a trail of damaged relationships in its wake.
2) Prepare Financially
Understand Your Current Financial Situation
If you were not previously involved in the family finances, now is the time to understand what has been going on. You should collect your tax returns, payroll stubs, regular bills, bank and investment statements, real estate information, and other documentation to gather a comprehensive snapshot of your current situation and your financial history.
When the divorce is over, you will be living independently, and you will need to take charge of your current finances. [Check out this course Divorce 101: Steps to Take Before Divorce to help you as you plan.]
Create a Post-Divorce Budget
Splitting your current lifestyle in two is difficult, and you need to understand all the costs involved. In addition to expenses related to the divorce, your existing assets will be split in two—and not necessarily 50/50.
In other words, you incur many new expenses to maintain a home of your own: moving costs, new furniture, a new mortgage or rent payments, and new heating, internet, and electricity bills. As you think about what your needs will be after the divorce, create a budget. Then you can protect your future and understand your needs. You may realize that the lifestyle you were accustomed to while you were married may look different after your divorce.
Open Individual Accounts
As you move on with your life, you will need your own checking and savings accounts, credit cards, and other financial information. The joint accounts you once had will eventually need to be closed, and you will maintain all the assets with just your name on them. If you need credit (such as a mortgage or car loan), your personal credit history will be the determining factor after the divorce. Start now by creating accounts in your name only.
Hire a Team of Divorce Professionals to Help You
Divorce is always a difficult process. But when you are over 50, it is an even higher-stakes endeavor. One of the best ways to protect yourself and your future is to build a qualified team of divorce professionals, who will assist you with the process.
There are three major areas of divorce: legal, financial, and emotional. You should hire a specialist to help you with each area. Given that divorce is a legal transaction, you will need an experienced divorce attorney to help you. To help with the complex financial considerations in divorce, hire a Certified Divorce Financial Analyst. A therapist can help you work through the often-devastating emotional effects of divorce, and can keep you focus on the big picture.
Don’t Forget about Social Security
After the age of 62, Social Security can serve as an important source of income for you. After divorce, you may have the option to claim your own Social Security benefits (or those of your ex-spouse’s). To receive your ex-spouse’s Social Security, you must meet certain criteria:
- You must have been married for 10 years or more.
- You must be over 62 years old.
- Your ex-spouse must be eligible to receive Social Security benefits.
- Benefits you are entitled to receive from your own work must be less than the benefits you would receive from your ex-spouse’s work. These specifics can be determined by going to the Social Security Administration website, and doing the calculation yourself.
Social Security has a lot of rules, and they can be confusing. Here are a few things to keep in mind:
- Social Security benefits are not marital assets, so you do not need to negotiate them during a settlement.
- You should learn your spouse’s anticipated Social Security benefit—to see if you should be claiming 50% of his or hers, or claiming your own benefit.
- If you do claim your spouse’s Social Security benefit, it will not have any direct impact on your spouse—as it is a government-sponsored program.
- Once you are eligible for full retirement benefits, you should start claiming them—since there is no way to catch up on missed benefits.
3) Divide Retirement Assets the Right Way
During divorce, retirement assets are the most complex to divide. There are three general categories of retirement assets: defined contribution plans, defined benefit plans, and individual retirement accounts. We will review each one to help you understand what is involved during divorce.
Defined Contribution Plans
With a defined contribution plan, the employer contributes a certain amount of money to the employee’s retirement plan—throughout the duration of that person’s employment. Upon reaching a certain age, funds can be withdrawn from the policy. The amount of money you have depends on the investment performance of the funds over time.
Defined Benefit Plans
Commonly called a pension plan, defined benefit plans guarantee an employee a specified monetary benefit once they reach retirement. The contribution formula takes age, duration of employment, and salary into account. Determining the value of a defined benefit plan is complicated, so the employee’s life expectancy is often a substantial factor in calculating the future value of benefits.
Individual Retirement Accounts (IRAs)
An IRA is one of the most common retirement plans. So participants are allowed to contribute a certain percentage of their annual income and deduct the contributed amount from their taxable income. IRAs have several types, including Tradition, Roth, SIMPLE, and SEP.
Dividing IRAs Is (usually) Easy
Dividing an IRA during divorce is simpler than other retirement plans, because it does not require a QDRO. A simple signed letter or a court order must indicate how to split the assets. And the IRA can be transferred to the other party without any negative tax consequences (when done properly). Future tax obligations will fall under the responsibility of the new IRA owner.
When to get a Qualified Domestic Relations Order (QDRO)
In divorce proceedings, couples typically require a QDRO to distribute their defined contribution or benefit plan. As per the divorce decree, the QDRO summarizes the division of a retirement plan.
It must contain the following:
- Personal Information - Details and mailing address of the retirement plan.
- Gains and Losses - Due to the investment market’s volatile nature, the potential gains and losses have to be accounted for when splitting a retirement plan. Parties may also decide on a set figure (without considering any potential gains and losses).
- Valuation Date - Retirement plans are valued at different intervals. In the QDRO, it is necessary to include the valuation date closest to the official divorce date.
- Surviving Spouse Provisions - To safeguard his or her own interests, it is important to have the former spouse listed as the beneficiary. In the event that the retirement-plan holder dies before the approval of the QDRO, the former spouse would still be entitled to a portion of the plan.
The QDRO is complicated and requires an expert who has experience drafting this agreements. If you are going to need one, present the QDRO to the plan manager long before the completion of divorce. Then you can ensure that you have covered the proper details, so you will avoid hang-ups later.
4) Review Your Estate Planning and Medical Coverage
When divorcing after 50, one of the most complex areas to consider is how to handle estate planning and insurance issues. Each of these issues could easily span a book (or an entire career), so we will only focus on the high-level concerns you should think about during divorce.
Contemplating your mortality is never fun, but it is an essential part of protecting your wishes.
After divorce, you will need to make sure you update your essential estate-planning documents. You and your estate attorney should investigate creating the following documents: a will, durable power of attorney, and healthcare proxy. You should also check and update the beneficiary designations on all of your accounts and insurance policies to ensure that they meet your wishes. If you have never looked at or prepared these documents before, the time after your divorce is a great place to start.
You probably do not want to end up in either one of these situations: your ex-spouse ends up receiving a large chunk of your assets, or is responsible for making essential medical decisions for you.
Life insurance can also play a key role in the estate-planning process, as it can provide your family with quick access to funds upon your death. And it can also play a role in minimizing estate taxes.
Medical costs and medical insurance only get more important with age. With the high costs of medical expenses, health insurance is one of the most important assets you can have. If you are covered by your spouse’s insurance plan when you start a divorce process, it is time to think about how that will affect your health insurance coverage in the future.
You can include health insurance coverage as part of the divorce decree—particularly if you were not working outside the home, and have easy access to health insurance after the divorce.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) was created to protect employees and their dependents from losing group-insurance coverage because of divorce or job loss. Therefore, under COBRA, you may be eligible for temporary insurance coverage through your spouse’s employer. COBRA has eligibility conditions. For instance, the company in question must employ at least 20 people. But if it is available, you may continue coverage for up to 36 months (at your own expense).
Divorce After 50: Final Thoughts
When facing divorce after 50, half of your assets (and your whole financial future) are at stake. So you need to make sure you focus on your long-term financial security. You should think about your retirement. How are you going to have enough cash for daily living? Know that the lifestyle you lived before the divorce will not necessarily continue.
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Shawn Leamon, MBA and Certified Divorce Financial Analyst, is the host of the Divorce and Your Money Show, the #1 show on iTunes that discusses personal finance issues in divorce. He is also author of Divorce and Your Money: The No-Nonsense Guide, available on Amazon. Learn more at www.divorceandyourmoney.com.