NAVIGATING A GRAY DIVORCE: HOW FINANCIAL ADVISORS CAN HELP YOU PROTECT YOUR FUTURE

If you’re among those divorcing at age 50 and over, you’ve got plenty of company these days. The trend of “gray divorce” has been on the rise for decades: In 1990, fewer than one in 10 people getting divorced were over 50. By 2019, it was one in three.

A split at any age can take an emotional and financial toll. But when you've invested more time and shared more assets, divorce can be especially complex. Here’s what to know if you’re going through a gray divorce – and why having the right professionals in your corner can make a difference for your future.

WHY IS GRAY DIVORCE ON THE RISE?

The reasons vary from one couple to the next, but there are a few common ones.

For one, divorce – even when it happens later in life – has lost much of its stigma and become more normalized in our culture. Look no further than well-known couples like Bill and Melinda Gates, who divorced in 2021 after 27 years of marriage.

“Empty nest syndrome” also plays a role. When the kids move out, many couples begin to realize they have little in common outside of parenting together. They may feel like they’ve grown apart – with different priorities, interests and needs – and closeness and connection are lacking in this new family dynamic.

Money issues have always been a leading cause of divorce, and these disagreements may become more pronounced as couples near retirement. And while infidelity is an obvious reason for divorce, many couples also experience “financial infidelity”, where spouses hide bills, large purchases, debts or accounts from one another. This kind of “cheating” can similarly test the stability of a long-term marriage.

Finally, at the heart of many gray divorces is one key factor: life expectancy. With potentially decades still ahead, some couples decide they don’t want to spend that time in an unfulfilling marriage. Unlike previous generations, they may have more freedom to reinvent themselves, pursue personal goals, or seek new companionship.

FINANCIAL RISKS OF A GRAY DIVORCE

The longer you’re married, the more assets you share with your spouse, and the more your finances intermingle. That’s why there are so many financial considerations – and risks – that come with gray divorce.

First, you’ll need to divide the wealth you’ve built, which may include decades of retirement savings. The retirement income you were planning for could be half of what you expected. At the same time, your expenses won’t be cut in half, and the money that supported one household will now have to support two.

If you’ve relied on your spouse’s plan for health insurance, you’ll need to find new coverage when you divorce. You may be able to extend coverage for up to 36 months through COBRA from your ex-spouse's plan, but this option can be expensive. You can also shop for an individual plan through the Health Insurance Marketplace, but keep in mind that premiums can likewise be higher because of your age or pre-existing conditions.

When you divorce, your tax rate is also likely to change. Switching from married-filing-jointly status to single or head-of-household status can mean a higher tax bill. There also may be tax implications that come with splitting assets, which we’ll cover more in a bit.

Along with all these considerations, the legal expenses of ending a marriage can put a serious dent in your finances. According to divorce mediation service Equitable Mediation, the cost of a mediated divorce can range from $6,000 to $10,000. But that’s at the low end. A collaborative divorce – where you and your spouse agree to settle without going to court – can cost between $25,000 and $50,000. A litigated divorce can average $75,000 to $150,000, with drawn-out or complicated cases exceeding $200,000.

DIVIDING ASSETS AFTER 50: WHAT TO EXPECT

If you and your spouse can’t come to an agreement about how to divide assets in your divorce, a judge will follow the law of your state.

Judges in most states use a system called equitable distribution, splitting all assets, earnings, debts and property in a way they deem fair – but not necessarily equal. The length of the marriage is one of many factors the judge may consider.

However, nine states follow the community property principle:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

In these states, the court determines whether each item is community property (usually assets acquired during the marriage) or separate property of one spouse. Then, everything classified as community property is typically divided 50-50, and each spouse keeps their separate property.

While these frameworks are helpful, there are also some asset-specific rules and nuances as well as tips to consider.  Let’s look at a few of them:

RETIREMENT ACCOUNTS

Employer-based plans like 401(k) plans, 403(b) plans and pensions typically must be divided through a qualified domestic relations order. A QDRO is a legal document, usually issued by a court or a state agency, that establishes one spouse’s right to receive all or a portion of the other’s retirement plan benefits. You can roll over, tax-free, all or part of any retirement plan distribution you receive under a QDRO.

A QDRO isn’t required to divide IRAs accumulated during your marriage, but you will need a divorce decree. Assets can be distributed from one spouse’s IRA to an IRA in the name of the other spouse. If the assets are moved as a transfer incident to divorce, the distribution won’t incur any taxes or early withdrawal penalties.

PROPERTY AND REAL ESTATE

Deciding what to do with the family home and the treasured possessions you’ve collected during your marriage can be difficult and emotional.

However, it may be wise to take a practical approach, especially when it comes to real estate. While your home (or homes, if you also have a vacation property) may have both sentimental and financial value, it’s also costly to maintain, and the partner who ends up with it risks winding up house poor. For many couples, it could make sense to sell the home, divide the proceeds and find housing that suits each individual.

INVESTMENT ACCOUNTS

As you're preparing for or going through a divorce, FINRA suggests a few key steps that can help you stay in control of brokerage, bank and other financial accounts. First – and this goes for your retirement accounts too – update your beneficiaries. Next, make sure you have access to all accounts you may be entitled to, especially if you’re not the one in the relationship who usually manages them. Before selling any assets, consider the tax consequences – like capital gains taxes – and other costs or penalties. Finally, coordinate with your financial institutions to distribute any joint accounts to each individual person according to your divorce decree or QDRO. When checking to make sure the financial institutions completed your request, you should review any applicable cost basis information to make sure your assets transferred correctly.

LIFE INSURANCE

If you currently have a policy, make sure you understand the type and the amount of coverage – and as with other accounts, update your beneficiaries. Life insurance policies may be subject to division in a divorce, particularly if it has cash value that's considered a marital asset. A growing number of divorce settlements now also require holding life insurance to protect child support and alimony payments. But if you don't already have coverage, you might consider purchasing a term life policy regardless of what the courts mandate.

RETIREMENT PLANNING DURING AND AFTER DIVORCE

A gray divorce can shake up your finances, but it doesn’t have to derail your retirement. You may just need some thoughtful restructuring. Here are a few places to start:

• Adjust your goals or timeline – Reassess your income sources and expenses and what’s most important to you in retirement. Achieving your goals could mean retiring a year or two later. But you might also discover new opportunities, like moving closer to family or pursuing part-time work you enjoy.
• Know your Social Security options – You may be able to collect up to half of your former spouse’s Social Security benefit based on their earnings history if:
  • Both you and your ex-spouse are at least 62 years old
  • You were married for at least 10 consecutive years
  • You’ve been divorced for at least two years
  • You are unmarried

However, you can only claim this benefit if it’s greater than your own benefit based on your earnings record.

• Consider home downsizing and revisiting spending plans – A new budget can help make sure your spending reflects your new financial reality. That can include downsizing to a smaller or more affordable home as you get older. Spending less on mortgage or rent along with taxes, fees and other expenses will obviously save you money. But with less home to maintain, you may also have more time to spend on yourself.

WHY A FINANCIAL ADVISOR IS CRITICAL IN A GRAY DIVORCE

When you’re about to go through a divorce, an attorney is probably the first professional you seek out. But other professionals, including tax experts and financial advisors, can play an important role on your team – especially in a gray divorce, where your finances have become more complex.

Your financial advisor can:

• Provide objective advice with intimate knowledge of your financial situation
• Collaborate with divorce attorneys and other professionals
• Help you understand the impact of dividing assets, including potential tax consequences
• Offer guidance on major decisions like whether to keep or sell the family home and when to take Social Security benefits
• Estimate how divorce may affect your retirement timeline and help you revise your goals, budget, financial plan and income strategy

WE’RE HERE TO SUPPORT YOU THROUGH THE TRANSITION

If you’re navigating a gray divorce, let’s talk. Our advisors can help guide you through the steps to take, help you make sense of your options and create a personalized plan for your next chapter – and beyond.