Gray Divorce: The Financial Implications of Untying the Knot later in life
Author: Emily Johnson
Baby boomers have long been trendsetters in American society. Today, the generation defined by independence and the rejection of traditional values is once again challenging a long-standing societal norm, with couples initiating divorce well into their “golden years.” This trend of individuals age 50 and over who are racing to untie the knot after 30 or 40-plus years, has become so pronounced that it has earned the title “Gray Divorce” and is the topic of studies across the globe. It has also posed some unique financial questions for the parties involved.
The reasons behind this increase in graying divorce are, not surprisingly, subject to broad speculation. The “Viagra divorce,” a common phrase I hear when talking with divorce practitioners, speaks for itself… Facebook and the Internet are also common culprits for dividing marriages of long duration, providing access to past flames who are, perhaps, newly single. But aside from these more tongue-in-cheek speculations, Graying Divorcees present some interesting statistics. For example, wives are initiating a much greater percentage of these divorces than their husbands, and that rate is increasing. Further, older couples appear to be responsible for the increase in (or maintenance of) overall divorce rates in most developed nations. Some social scientists suggest that this trend may be an unforeseen, yet predictable, result of the Women’s Movement. Others site increased longevity and better health later in life as drivers. Speculation abounds regarding fault, motivations, etc., as is true with divorce at any age. But one aspect of Gray Divorce is unique: the financial impact of dividing a marital unit close to, or during, retirement.
The defining financial challenge for Gray Divorcees is the limited number of earnings years remaining prior to retirement (if not already “retired” in some fashion). This brings to light three significant financial considerations for couples considering parting ways later in life:
1.Sources of Income. Retirement income typically comes from one or more of the following sources: Social Security, pensions, earned income (part-time or full-time), and investment income (typically from 401(k)s, IRAs, or other savings). Depending on the age of the divorcing parties, earned income typically declines, forcing couples to focus more attention on the other income sources. And not surprisingly, after a decade-long challenging economy, investment income has declined for many families, forcing an acute focus on Social Security and pensions. While these sources seem straightforward, nuances need to be considered carefully when seeking a split. With Social Security, for example, a non-working or lower earning spouse may claim the greater of his/her Social Security benefit or 50 percent of his/her spouse’s benefit at retirement, without reducing the benefit received by the spouse, as long as the couple has been married for at least 10 years. Thus, divorcing couples have the opportunity to use Uncle Sam’s money to solve their soon-to-be-separate cash flow issues. Pensions have similarly often overlooked nuances. Some pensions can be split pursuant to divorce; others cannot. Some pensions provide survivor benefits; others don’t. All of this information needs to be carefully assessed prior to filing for divorce.
2.Assumptions Regarding Alimony/Spousal Support. The assumption exists for most women who have been married for 30-plus years, raising children, making a home, assisting with the furthering of a spouse’s career, etc., that they are entitled to alimony from their divorcing spouse forever. The legal term for this concept is “permanent alimony,” and it is becoming, much to the dismay of the many women who assumed it was fact, a relic of history. Less and less frequently are spouses being “awarded” (I’ve always disliked that characterization) permanent alimony. More commonly, retired couples seeking divorce will divide existing assets, including pension income if available, and no or very little alimony will be considered. Of course, this is subject to age and age differentials, the health of the parties, dependents in the home, etc. But in a vacuum, permanent alimony is no longer the norm, but the exception.
3.Health Care Costs. Health care costs are a significant consideration, especially for divorcing couples prior to Medicare eligibility. Most employer-provided health benefits terminate upon divorce, leaving the non-employee spouse with COBRA or seeking private health insurance. Obtaining a job with health benefits may be an option as well. Add to this conundrum the likelihood that health care costs are on the rise, and health care expense poses a very real concern for divorcing couples.
Regardless of the speculative “why’s” surrounding Gray Divorce, the parties involved cannot afford to lose sight of the financial reality into which they are about to enter. Due to their age, graying divorcees do not have the safety net of future earnings years ahead to buoy their finances. As author Orson Welles said, “If you want a happy ending, that depends, of course, on where you stop your story.”
Emily Johnson is a Certified Financial Planner (CFP) Certified Divorce Financial Analyst (CDFA) serving clients throughout the Southeast.