There is a lot of discussion about how much divorce hurts, but it doesn’t just hurt on an emotional level. The damage can be seen in the financial fallout as well. The financial fallout of divorce can be even more significant when divorcing later in life. Many who are experiencing late-life divorce may see their carefully laid retirement plans start to unravel.
Late-life divorce or what some refer to as gray divorce has been on the rise since 1990 with the divorce rate among 55 to 64 year olds more than doubling and the rate for couples 65 and up tripling. At the current rates, one in four couples over 50 divorce.
These significant rates of divorce after 50 have some serious implications; particularly for women. More than 25% of women who go through a gray divorce end up living at or below poverty level. The same is true for approximately 11% of gray divorced men. Considering these statistics, when couples split during their golden years, expectations of retirement must be adjusted since whatever a couple planned to depend on for their retirement becomes, in the simplest terms, 50% less.
Adjusting Retirement Expectations After Gray Divorce: Married couples share many of life’s expenses: mortgage payments or rent, utilities, water, trash, phone plans, and more. Once a couple divorces, each spouse generates their own separate expenses. Financial planning experts estimate that, on average, it costs 25% more for a couple in this type of situation to run two households instead of one. And unless the couple is somehow able to come into 25% more in resources post-divorce, this creates a problem. Newly divorced couples could consider reducing or eliminating contributions to their retirement plans in order to cover the additional costs, but this disrupts their retirement planning and could jeopardize the security they carefully created for their future. Most will need to consider adjusting their lifestyle after carefully considering how much their post-divorce expenses will be.
Altering the Retirement Date: Some in this situation will consider working longer – postponing the date of their retirement increases the time they have to continue adding to the retirement funds. For some who divorce after the age of 50, staying in the workforce longer than originally planned can serve as a blanket solution. In fact, many financial planners will advise older clients in this situation keep working as long as possible in order to cover on-going expenses and building up savings for the time when they need to stop working. Others in this situation may find themselves entering the workforce for the first time or for the first time after many years out of the office. In this situation, pay rate is usually affected.
Avoid Getting Trapped in the “Family” Home: In most cases, the best option is to sell the home they previously shared. It’s probable that the couple has lived in the home for a while and have built up equity that could be used to supplement retirement. Attempting to keep the family home can quickly become too expensive for an individual and often leads to premature IRA distributions and penalties and taxes while contributions to 401(k)s and IRAs cease. The retirement funds are quickly depleted instead of seeing the intended growth. Divorcees that are forced to sell post-divorce can trigger a large capital gain tax, but if the home is sold during the divorce, the couple can each tap their $250,000 capital gain exclusion for a total of $500,000 potentially eliminating or mitigating the impact of capital gains from selling the home.
If you have questions about how to protect your retirement from the negative effects of a gray divorce, please get in touch with one of the experienced divorce attorneys at Aronow Law PC today.