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Women & Finance: Financial Planning Issues to Consider when Navigating a Gray Divorce

 

Divorce rates in the United States have been steadily declining over the past two decades, which is great news for all who participate in the institution. According to recent research, however, 36% of divorcing adults are age 50 or older, which is a number that has doubled since 1990. Even more surprisingly, the 65 and older demographic has tripled their divorce rates in the same period – This upward trend in divorce seen in couples over age 50 is so popular in fact, that it is now commonly referred to as “gray divorce”.

The financial impact of divorce at any age can be stressful, but gray divorce comes with its own set of unique and complex challenges to navigate. Being aware of these challenges ahead of time can help you chart the waters with greater confidence and adequate financial planning can play a crucial role in divorcees emerging to enjoy their later years in the best financial shape possible.

 

What arrangements have you made for housing?

 

The most challenging aspect of divorce is decisions surrounding the family home – especially if this is the long-term residence where memories were created. Will you keep or sell the family home? If you decide to sell the family home, you can settle the debt and divide the remaining proceeds from the sale. You may want to consult a CPA if you should file taxes together or separately given the capital gains tax exemption limits.

If you decide to stay in the family home, can you realistically afford to pay property taxes, insurance, and maintenance without significantly sacrificing your lifestyle during your golden years? How will you compensate your ex-spouse by keeping the home? Will you have to take on additional debt? If you take this route, you will need to get the house appraised and seek assistance in properly re-setting the financial structure of the mortgage, and how to buy out your ex-spouse. Housing is a critical aspect of gray divorce as it offers an opportunity to not only reset your life but also holds significant positive or negative financial implications depending on what you decide.

 

Asset division considerations

 

Having built a life together in gray divorce, there will naturally be more accumulated goods and assets to split. In dividing assets, you will want to be aware of the tax ramifications of taxable accounts and retirement accounts.

For example, any employer sponsored retirement plan or pension plan subject to ERISA – may be addressed by a QDRO (Qualified Domestic Relations Order) to allow tax-free rollover of funds distributed from the division. In a similar vein, an IRA can be handled through a “transfer incident to divorce” submitted to a judge or mediator.

Pensions will need to be treated differently than your retirement accounts. Pensions have future value, and you will need an expert to help you calculate it, and the timing of receiving your fair share in the form of lump sum payment or receive it as a pension annuity later.

Taxable assets in a joint account or individual account should be carefully divided with cost basis in mind. It would not be fair for one spouse to obtain more securities with a low-cost basis that have appreciated over time as capital gains will be due when these assets are sold.

 

Social security benefits

 

A commonly misunderstood aspect of financial planning is the social security benefit. If you are at least 62 years of age and were married to your ex-spouse for 10 consecutive years or more, you may be eligible for social security benefits calculated based on your ex-spouses’ earnings. This benefit will only apply if it exceeds your own and both benefits cannot be combined – so you cannot claim your benefit and additional benefits calculated via your ex-spouse. In addition, you must not remarry to retain this eligibility.

Interestingly, one may choose to switch from their ex-spouses benefit to their own benefit later, particularly if their own benefit becomes the better option of the two, such as when they grow due to delayed retirement. You can read more about various aspects of divorce and social security benefits on the SSA website by clicking here.

 

How are you planning to navigate the landscape of Health Insurance?

 

Assessing health insurance coverage is a perennial challenge for many, however a gray divorce may present additional complexities depending on when the event is slated to fall relative to retirement. In pre-retirement, prior to Medicare eligibility, you will need to secure coverage if it was previously obtained through your ex-spouse. Several immediate options present themselves: via your employer (should you have one), via COBRA, the ACA marketplace, or Medicaid.

 

Are you planning on (re)visiting your estate planning? What specific aspects matter the most to you?

 

Perhaps the most overlooked aspect of gray divorce is estate planning. This is a particularly common challenge considering many divorcees have had their partner handle much of the financial planning throughout their married life. Aspects like creating or updating estate planning details – such as wills or trusts and modifying beneficiary designations, are some of the most important steps in tidying up your financial future after a divorce. Remember that beneficiary designation in retirement accounts and life insurance will supersede what is stated in the will. It is critical to ensure your wishes are aligned with your most recent preferences in the account beneficiary designation and estate planning documents. For instance, if you decide to remarry, consider how your estate plan will protect your children receiving their fair share of inheritance before it goes to your new spouse.

Divorce is sufficiently stressful on its own without having to navigate the minutia of financial decisions that need to be considered after a major life shift. It is wise to seek experts such as a Certified Divorce Financial Analyst (CDFA) who can help position you for this next phase of life. Implementing a comprehensive financial plan tailored to your needs can help give you the confidence to lead a more financially secure life after divorce.

 

About the author Jackie Fontana, CFP®, CDFA®: Over the past 20 years, Jackie has enjoyed a diverse global career in financial services and business development. At FBB, her primary focus is providing holistic financial planning by working with her clients on retirement planning, education funding, risk management, and tax optimization advice. Jackie began her career in private wealth management, working with Sanford Bernstein and Deutsche Bank in the Los Angeles area. This was followed by a successful stint in Melbourne, Australia working in executive recruitment for Robert Half International. Most recently, Jackie worked with the Institute of International Finance, managing key relationships with prominent senior banking executives across Europe and Asia. Jackie is a Certified Financial Planner™ practitioner and Certified Divorce Financial Analyst. She holds a Bachelor of Arts Degree from the University of California Davis, and a Master of Arts in International Affairs from American University. Jackie speaks fluent Korean and resides in Darnestown, Maryland with her husband Eric and their three boys. Outside of work, Jackie is an outdoor enthusiast who is passionate about travel and cheering for her boys at swim meets.

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