After steadily rising for decades, overall divorce rates in the United States hit a 50-year low in 2019. While marriage advocates are celebrating the decline in broken unions, their joy may be short-lived.
Divorce rates are expected to spike again in the aftermath of the pandemic. After spending 24/7 together — with little outside social contact coupled with the financial, emotional and physical stress of the pandemic — some couples are taking a hard look at their marriage. For certain empty-nesters, the pandemic was a preview of what retirement with their spouse might look like, and they didn’t like what they saw.
Recently, several of our financial advisers have reported a noticeable uptick in calls inquiring about the financial implications of divorce. Many of those calls are from clients in their 50s and above. These later-in-life dissolutions, like the highly publicized split by Bill and Melinda French Gates, are known as “gray divorces” and they are on the rise.
Since the 1990s, the divorce rate for adults 50 and older in the U.S. has roughly doubled, according to findings from the Pew Research Center. In fact, for adults 65 and older, the divorce rate has tripled over that same period and is even worse for remarriages.
Demographics, social changes and the pandemic have all contributed to the trend. People are living longer, women are more financially empowered, and the stigma of divorce has lessened. A healthy 65-year-old can expect to live another 20-plus years, and women typically live five additional years. Many look ahead and decide this is a long time to spend in an unhappy marriage.
However, a later-life divorce is complicated and requires careful financial planning. As with the Gates divorce, decades of building wealth and raising a family make it more challenging to divide assets in a mutually agreed upon and equitable manner. For most divorcing couples, hiring an experienced attorney to represent and protect each individual’s interest is wise, especially since divorce laws and insurance laws vary from state to state.
When thinking about the financial considerations, there are three areas to focus on:
1. Tackling the big questions
Absent a prenup, there are several big questions that will surface right away. If a couple can agree on these areas, it will help expedite the matter and save on attorney fees.
- If children are in the picture, what are your wishes regarding custody, visitation, child support, healthcare and education funding?
- Do you have adult children expecting support for weddings or help with the purchase of a first home? How are funds set aside for this type of commitment?
- Do you earn enough money to adequately support yourself, or should alimony be considered?
- What and where are all the financial assets and how are they titled? Which assets do you want, and which are you willing to let your spouse keep? Make sure you have an asset inventory and you understand the value of each asset.
- Are there retirement plans for each spouse?
- Is there enough money to pay any outstanding debt on whatever assets you keep?
- How do you feel about the family home? Do you feel strongly about living there, or should it be sold or allotted to your spouse?
- Are there separate or personal assets of each spouse, including trust funds and inheritances? How does state law affect the impact of separate or inherited assets when determining alimony or the division of property?
2. Definite do’s and don’ts
Divorce is an emotional, highly charged life transition that often leads to rash and unwise decisions. Here are some definite do’s and don’ts when it comes to your finances:
- Do prepare a financial plan and budget to help guide you until your divorce is final
- Do review monthly bank and financial statements and make copies for your attorney
- Do review all tax returns that have been filed jointly or separately and make sure all taxes have been paid to date
- Do get help from a financial adviser, especially if you don’t currently have the skills and energy to do this on your own
- Don’t make large purchases or create additional debt that might later cause financial hardship
- Don’t quit your job or move out of the house before consulting your financial adviser and attorney
- Don’t transfer or give away assets that are owned jointly
3. Sometimes overlooked (financial considerations)
In a gray divorce, there are often additional financial considerations that may be overlooked. Being aware of these considerations will help you think comprehensively about your settlement.
Nearly every financial decision you make and every asset you receive comes with a tax bill. Understanding the tax implications is important, so be sure to consult an accountant or tax adviser to determine what makes the most sense for your situation before divvying up assets. Also remember that alimony is no longer deductible for the spouse paying it, and it’s not taxable to the person receiving it. Child support payments aren’t taxable, either.
Life insurance often plays a key role, especially if there was a financially dependent spouse. Naming your ex-spouse as beneficiary may be required as part of your divorce. As alimony terminates on the death of the payer, life insurance may be used as a tool to guarantee a stream of income if the alimony-paying spouse passes. The divorce decree will often require life insurance on the person paying alimony and/or child support in the event of their death. Disability and long-term-care insurance are also considerations for post-divorce emergencies and should be addressed if appropriate in the divorce settlement.
Retirement assets that have accumulated over 25-plus years can represent a substantial part of a couple’s wealth. Splitting retirement assets comes with some special considerations — and often a second step. A qualified domestic relations order, or QDRO, is typically used to divide certain employer retirement and pension plans. A QDRO recognizes joint martial interest in the retirement assets, giving the ex-spouse a share of those assets.
If you’ve been in a marriage that’s longer than 10 years and get divorced, you’re generally entitled to half of your spouse’s Social Security, providing that the benefit is greater than what you would qualify for, and that you remain unmarried. You must be age 62 or older and if you file prior to full retirement age (FRA); you will receive reduced benefits for tapping Social Security before your FRA.
If you qualify for your own Social Security, but the amount is lower, you will get an additional amount up to the 50% spousal benefit. If your ex-spouse is deceased, you are eligible for the same survivor benefits as current spouses, which means you could receive the full amount of your ex’s benefits. Note that your former spouse doesn’t have to be collecting his or her retirement benefits yet for you to claim ex-spousal benefits. However, if this is the case, the divorce must be at least two years old.
Employer stock options
If either spouse works for a corporation, there may be employer stock incentives that will require additional analysis before these assets can be divvied up. Valuing stock options is complex, as they typically have vesting periods, unique tax considerations and carry various risks, including market and employment risk. Often corporate executives will get full access to their options at retirement, which is another point to consider. As the value of the stock or option typically fluctuates over time, it is important to understand the risk-reward and trade-offs when determining the value.
While the divorce is ongoing, your spouse has certain rights. Make sure you meet your legal obligations while exercising as much control over your assets as possible. There are a few things you can do prior to the divorce, but you should update your estate plan as soon as legally possible. For example, you will want to update your healthcare proxy, power of attorney and will, change beneficiaries on your retirement accounts and life insurance, retitle assets and amend your trust. Estate planning is also necessary before you remarry in order to protect and preserve assets for your children and grandchildren.
Financial implications for women
Women face unique financial headwinds. They often earn less than men and start retirement with smaller amounts saved and lower Social Security benefits, so they can be in a particularly precarious position after a divorce. When coupled with a later-life divorce, the financial outcome can be disastrous, especially for women who were primary caregivers to the children.
According to a report from the U.S. Government Accountability Office, women’s household income fell by 41% following a divorce or separation after age 50, while men only had a 23% drop. With women living longer than men, that dip in income can have serious consequences. With divorce being such an emotionally and financially challenging time with a lot of important decisions to be made, easing the burden with trusted legal and financial advice will help you take a comprehensive approach to this significant life transition and feel more secure about your future.
Angie O’Leary is head of Wealth Planning at RBC Wealth Management-U.S.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.