For most of us, our retirement dreams are filled with time for enjoyment after decades of hard work. But for an increasing number of older couples, retirement is bringing something completely unexpected: divorce.
With their adult children gone and an empty nest at home, some retirees decide they no longer want to be married. Or, facing 20 or 30 years in the second season of their lives, some couples decide they’d rather not spend it with spouses they no longer have anything in common with. That’s why, at a time when divorce is becoming less common for younger adults, so-called ‘gray divorce’ is on a dramatic rise. According to a 2017 report by the Pew Research Center, the divorce rate among U.S. adults age 50 and older has roughly doubled since the 1990s. For people 65 and older, the divorce rate has tripled since 1990, and it continues to climb each year.
Divorce at any age has serious consequences. It can create emotional instability, but it can also cause serious financial damage for both spouses. Whatever money the couple has in savings, pensions, 401(k) plans, and other sources of retirement income will usually need to be divided. Newly single retirees may find themselves with a new set of expenses, such as rent and health care insurance. And while older divorcers like baby boomers aren’t typically involved in lengthy child custody battles, they have less time to rebuild their nest egg. This profound impact on retirement funds often forces people to readjust their plans and their standard of living. If a gray divorce is on the horizon, here are some helpful pointers for handling your assets so you can keep your retirement dreams alive and well.
Meet with a financial advisor before you do any negotiating. While most people who are considering divorce think about contacting a lawyer right away, a financial advisor can help determine how to best meet your financial and retirement goals given the changes you’ll be facing. Seize this process as an opportunity to get what you really want in your post-divorce life. Perhaps you wanted to live in a warmer climate and your ex didn’t. Maybe you had different ideas about how you handled risk and investments. Be sure to meet with your advisor before, during and after your settlement negotiations to determine how best to put your new financial plan into action.
Keep your current and future tax consequences in mind. It’s critical to understand what you have in pre-tax and after-tax assets and how they’ll affect what you’re going to owe Uncle Sam in the long term. Once you’re unmarried or legally separated from your spouse, you’ll be filing as single. That means your standard deduction will be cut in half and you may end up in a higher tax bracket. If it looks as if your retirement income will push you into a higher tax bracket in the future, talk to your financial professional about what you can do now to lower your tax burden later.
Take steps to make the most of every penny of your retirement income. Social Security benefits aren’t considered community property, but you will have to make some decisions about how you’ll file when you’re divorced. If your marriage lasted 10 years or longer, you still can receive benefits on your ex-spouse’s record if you’re unmarried, age 62 or older, and your Social Security benefit is less than your ex-spouse’s. But there are rules for when you can file and how much you’ll get, so be sure to discuss it with your financial advisor first.
Catch-up contributions to your tax-favored retirement accounts can also help you fill the gap between what funds you have and what you’ll need. If you’re 50 or older, talk to your advisor about what it would take to build up your retirement accounts.