Divorce rates for most age groups have leveled off, but for people age 50 and older, it's higher than ever.
Today 1 in 4 divorces is a couple over 50 untying the knot—about double what it was 20 years ago, according to the National Center for Family and Marriage at Bowling Green State University. Though divorce at any age comes with financial consequences, it's particularly fraught when retirement is in the crosshairs.
"When people spend a lifetime together and they look at finances together, when divorce comes, it's a different thing," said financial advisor Chris Chen, of Insight Financial Strategists.
At 50-plus, there are more assets and possibly more debt, more retirement accounts and more estate-planning issues. What isn't there is a lot of time. Older divorcees may not have a chance to course-correct for bad retirement-planning decisions.
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"It's really hard to get a divorce judgment overturned on appeal," said Lori Lustberg, a lawyer, mediator and independent divorce financial analyst. A spouse who gets an award of support will have a hard time getting it readjusted to reflect higher inflation in a few years, for instance.
Working with a financial planner or a certified divorce financial analyst—someone trained to look at the financial implications of these decisions—can help soon-to-be exes avoid financial pitfalls before the divorce decree becomes final.
When it comes to splitting retirement assets, it's not always a 50/50 division. Divorce laws are governed by state, so judges and mediators have wide latitude about the actual terms of the split. They come up with the percentages of retirement accounts that each spouse receives.
To divide a 401(k) plan or a pension tax-free, you'll need a court-ordered qualified domestic relations order, or QDRO. The QDRO tells the plan administrator how much to pay the non-employee spouse's share of the plan. The lump sum can then be deposited into another tax-sheltered account.
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A QDRO is not necessary to divide individual retirement account or simplified employee pension (SEP) IRA assets, however.
"People sometimes delay getting the QDRO, and I really urge them to do it sooner rather than later," Insight Financial Strategists' Chen, who is both a certified financial planner and a certified divorce financial analyst.
Dilly-dallying can have dire consequences. Chen recalled a client whose husband delayed obtaining a QDRO. The husband died suddenly, without the document having been given to the pension administrator. "His wife lost all the spousal benefit that she was entitled to," he said.
Of course, retirement assets are not just those that exist in a 401(k) plan or IRA. Couples use all sorts of assets to help them plan for retirement.
What to do with the house is a subject accompanied by deep emotions, both from couples and their financial advisors. The way many financial advisors tell it, spouses—especially women—often have an irrational attachment to the home. They often see it as the embodiment of all that was good about the marriage.
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"It's the biggest mistake that most women make," said financial planner Candace Bahr, founder and managing partner of Bahr Investment Group. Bahr's not-for-profit organization, Women's Institute for Financial Education, holds monthly divorce workshops at a local community college in the Carlsbad, California, area.
"I call it the marriage mansion," she said. "Women want to keep the home, even if it's not appropriate."
But a house can also be viewed as a retirement asset, argued Sandy Voit, a certified divorce financial analyst with Tangible Solutions. And it's more tax-efficient than other pools of retirement money.
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In the Seattle region, where Voit is located, it's not uncommon for clients who work for large-area employers, such as Microsoft or Boeing, to sell a home for $1 million or more. Assuming closing costs of 8 percent, a $500,000 original purchase price and $100,000 in capital improvement, a home could end up earning its owners a net profit of $320,000.
For couples, $500,000 of the capital gain is tax-free, so selling a property prior to the divorce decree might be prudent. But it might make sense post-divorce, too, Voit said. In that case, $250,000 would be tax-free for the single person and $70,000 taxed at the favorable 15 percent or 20 percent capital gains tax rate.
"From a tax perspective, that might still make sense," he said, comparing home sales to withdrawals from 401(k) plans and IRAs. The latter are taxed at the ordinary tax rate, which can run as high as 39.6 percent.
When it comes to Social Security, divorced couples have some options, but they need to be mindful of the timing.
First, an ex-spouse is entitled to spousal benefits—half of their ex's benefit—starting at age 62, even after divorce. Spouses can receive this benefit as long as they were married at least 10 years and not remarried when they start collecting the benefit. And having an ex collect a spousal benefit does not affect the primary beneficiary's Social Security payments at all.
"The only way you can screw this up is by remarrying someone who is not making as much money as your ex," said Bahr at Bahr Investment Group.
And it gets better. Should an ex die first, spouses can get a step up to the higher benefit, the same they would receive if they were still married to the person. As divorce financial analyst Lustberg put it, that's "very valuable income."
How you invest your assets should not change much post-divorce.
At Insight Financial Strategists, Chen has found that older divorced couples, for example, often become too risk-averse—even if doing so means their portfolio won't keep up with inflation. "Risk tolerance is all about perception," he said. "The way that people who are under stress look at it, they don't believe they'll lose 20 percent [in a down market]; all they hear is 100 percent."
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Some clients insist on keeping their money in cash, a move that Chen calls "a very safe way to lose money." Even someone in his or her 50s needs a healthy dose of equities in order to make sure their money keeps pace with inflation.
"Even at 65, people could have a 30-year horizon, and they do need to be invested more aggressively," said Chen.