Since 1990, the divorce rate for people 50+ has doubled. For ages 65+, the rate has approximately tripled. This is while the divorce rate of younger couples has dropped, all according to the National Center for Health Statistics and the U.S. Census Bureau.1
With divorce rates among older couples skyrocketing, you’ve likely seen evidence of it for yourself. A senior-age woman who has been married for 40 years wants her independence. An older man feels he’s grown apart from his wife of decades.
What many people may not immediately consider is how a divorce at this stage could affect their retirement years, especially financially. Individuals getting divorced after age 50 can expect their wealth to drop by about 50%. Not shocking, as splitting up means splitting up assets equitably. You can offer them what they really need: a “retirement rescue plan.”
Financial (and Emotional) Challenges
Divorce can wreak havoc with finances and can be a threat to financial independence. Hopefully, older couples are being thoughtful and doing what they feel is right. As during any life changing event, advisors have an opportunity to understand and offer appropriate strategies moving forward.
Making up financial ground post-divorce can be challenging, even though people are staying in the workforce longer than ever. Older workers (55+) are making up a higher and higher percentage of the U.S. labor force: in 2016, that group made up 22.4% of America’s workforce, and it’s projected to reach 24.8% by 2026.2
About 3 out of 4 women face significant savings shortfalls if they plan to retire at age 67, according to retirement consulting firm Aon.3 So, many older women, either after a divorce or after a spouse’s death, are delaying retirement and working longer.
An advisor needs to balance empathy with professional decorum in these delicate circumstances. Even presenting various options moving forward can be met with emotional responses, depending on the client.
During a Retirement Rescue Plan, Opportunities Abound
The opportunities are many during a gray divorce. In fact, you can really show your value by guiding these clients to better lives. With gray divorce, two separate “retirement rescue plans” may now need to be crafted.
Here are some financial factors to include when crafting any retirement rescue plan.
Typically, as assets are divided down the middle 50-50, so too will any existing retirement plan. If your state is not an equitable distribution state, the 50-50 community property split (for assets acquired after marriage) may not be so simple. For assets brought into the marriage and kept separate, their growth may not need to be included in the 50-50 split.
When an employer-sponsored retirement plan is involved, inform the nonparticipant that he/she needs a Qualified Domestic Relations Order (QDRO) in order to get paid out. While rolling over to an IRA is a typical option, ask if that money may be needed for another purpose because proceeds distributed under a QDRO prior to rollover to an IRA can be taken without the typical 10% penalty.4
A pension earned during a marriage is usually considered to be a joint asset. If a pension is divided between divorcing spouses, it must generally be done at the time of divorce when other marital assets are divided.
Many seniors don’t understand how Social Security benefits work and have misconceptions that could negatively affect their plans. You can explain timing benefit withdrawals and maximizing available benefits, such as the spousal Social Security benefit: those married for 10 years, not remarried and over 62 are entitled to receive up to ½ (at their full retirement age) of the ex-spouse's full retirement benefits.4
Life insurance can act to offset future alimony, in a way. Here’s how it can work: the less-well-off spouse (income-wise) keeps some life insurance on the other, the one with more income (let’s assume the husband in this case). If the husband dies, the wife gets the life insurance lump sum instead of the upcoming alimony.
Plus, remind clients to update the beneficiaries on all financial accounts; ex-spouses should be removed from all retirement funds, life insurance policies and other accounts.
It may not be common, but what if one spouse has never worked at all during the marriage?
During many gray divorces, the husband is close to his career being over. He may argue, therefore, that any future alimony payments should only last a few years. She may respond that this could make it especially difficult for her to get financially established. These negotiations can be challenging.
How can a prenuptial agreement affect a gray divorce?
In theory, it should make the process smoother. Yet, as many advisors have found, a couple may be more ready to amicably split commingled assets (not prenup). It’s an expectation by both spouses, so not having a prenup can often make the process easier.
What if a business is owned together?
Some businesses have agreements in place regarding who buys out whom, however couples generally don’t have an agreement in place. In these cases, the spouse continuing the business wants it valued low, and the other wants it as high as possible.
How can an annuity be attractive to divorced seniors?
Divorced seniors share the same fears as other seniors, although perhaps with more intensity. They’re frightened of outliving their retirement savings, too, so protected lifetime income that locks in a minimum income stream to the policyholder for life can sound good.
As your older clients experience various life changes, including divorce for some, advisors are able to guide them to a better life now and during retirement. If some of them aren’t financially ready to retire, consider all their options by reading Are Your Clients Facing a Retirement Income Crisis?, our guide to helping you better understand today’s retirees.
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™
Marshall is CUNA Mutual Group's Advanced Planning Expert and has more than 25 years experience in the insurance and financial services industry. He consults Financial Advisors on advanced retirement planning concepts for retirement and wealth management clients.
1ThinkAdvisor, When Clients Divorce After 50, How Advisors Can Rescue Retirement Plans, May 28, 2019
2The Conference Board, The Rising Role of Older Women in the Labor Force and Why “Full Employment” May Get Still Fuller, June 4, 2018
3cnbc.com, Why women will fall short in retirement, even if they wait until age 67, March 19, 2019
4U.S. News & World Report, How to Retool Your Retirement Plan After Divorce, October 15, 2019