Divorce at any age can be tough. It can put a strain on finances regardless of the age of the parties involved. However, divorce after 50 can be especially difficult, even under the best circumstances. While younger couples may take a financial hit by dealing with reduced income, less wealth and higher living expenses, they have more years to retirement to make up for the loss. Divorcing couples over the age of 50 have less time before retirement to make up for the income they have lost; therefore, their retirement plans are likely to be derailed.
The bad news is that the divorce rate has doubled from 1990 to 2010 for couples 50 and older, according to a study from Bowling Green State University. The divorce rate for adults between the ages of 50-64 rose from 6.9 per thousand couples in 1990 to 13.1 per thousand in 2010. For adults over 65, the rate has risen from 1.8 per thousand couples in 1990 to 4.8 per thousand in 2010. The good news is that there are ways that older adults can minimize the expected financial hit and protect their retirement finances.
Moving to Less Expensive Home
For adults divorcing after age 50, it is expected that household income will drop 23 percent for men and 41 percent for women. One way to make up for that drop in income is to move to a less expensive home. While staying in the family home may be a comfort and provide stability after a tough divorce, reducing housing costs will help free up money to bolster up retirement savings and investments.
For example, by reducing housing costs by $500 a month and putting that money into an investment that provides a 5 percent return for the next ten years, an additional $77,000 can be generated for retirement. If a couple’s home is sold, the money from the sale can be used toward building a large and diversified income-generating portfolio. The cash that would be available after downsizing to a smaller house could be used to make catch-up contributions to retirement plans. Up to $24,000 a year can be added to a 401(k) and $6,500 to an IRA.
Splitting Income
Illinois is not a community property state. Any money or property that has been acquired during a marriage is considered to belong to the marriage. Unlike an even 50-50 split that would occur in a community property state, these assets are subject to an equitable distribution between the divorcing parties. When deciding on an equitable distribution of assets, factors such as earnings power, work records and the length of the marriage are considered. If the divorcing parties and their divorce lawyers are unable to agree on the distribution of assets, the judge hearing the divorce case will decide it for them.
When negotiating an equitable distribution, the participating divorce lawyers are likely to focus on valuing financial assets according to their sustainability for generating income. The tax liability of the assets are an important factor that should be considered. For example, all withdrawals from a $500,000 401(k) will be taxed at ordinary income rates. This would make the asset worth less than a $500,000 taxable interest account where only the gains on the investment would be taxed.
It is important to also consider Social Security. Upon reaching age 62, the spouse with the lesser benefit may opt to request a benefit of 50 percent of what their ex receives if it is more than his or her full benefit. This provision is subject to certain conditions, including that the marriage must have lasted for at least 10 years.
Don’t Delay with Splitting Assets
A divorce decree only states who gets what. The divorced parties will need to take it upon themselves to make sure they receive the assets they are due. Waiting too long can be dangerous. For example, if one party is entitled to part of their spouse’s 401(k), they will have no control over how it is invested or if the ex-spouse borrows money from it until his or her money is moved out of that account.
To prevent that from happening to a 401(k) or a private-sector pension, the owed spouse would need to file a qualified domestic relations order (QDRO) with his or her divorce lawyer to authorize the transfer for each account. Other investments or income, including military benefits, public pensions and IRAs will require specific paperwork to be filed.
It is also a good time to review estate documents, including wills, trusts, powers of attorney and any beneficiary designations. Even if the beneficiary is not changing on a particular investment account, it is necessary to re-execute those documents after a divorce.
