Divorce, And Other Disruptors
by P.E. KelleyMr. Kelley is managing editor of this magazine. Connect with him by e-mail: [email protected]
Aimee Johnson is Advanced Markets Manager for Allianz Life Insurance Company of North America (Allianz Life®), and manages the company’s Women’s Market program.
As part of our series on late-in-life planning scenarios, which normally focuses on potential income shortfalls and pre-retirement strategic investment, we spoke with her about the impact that divorce might have on existing, and often mature, retirement income accounts.
According to Johnson, even the most comprehensive plans often overlook the possibility of divorce… why would anyone want to plan for that? But they should. Especially women.
The biggest worry for most retirees is the longevity-risk: running out of money before you run out of breath. And if the plan is disrupted close to retirement, implications of financial ruin can be overwhelming. Johnson discussed the steps your clients might consider to help them still reach their financial goals.
PEK: For couples who divorce later in life, what is the immediate, and long term, threat to the existing retirement plans. How are they allocated and what does impact ‘retirement readiness’?
AJ: When divorce occurs later in life, the immediate threat to existing retirement plans is that retirement assets saved for funding one household in retirement will now be used to fund two households. This fact alone may result in a retirement savings deficit for both individuals. For instance, a single household would have shared expenses and maybe two incomes to pay for them. But going forward, there will be dual households with more expenses using the same income, which can pose a great challenge to clients.
Of course, financial circumstances are dependent upon each situation. If we look at a household where there is a primary income earner, for example, sometimes the state will award alimony on a short-term basis (1-2 years) to help a spouse get established. Some judges may even award lifetime alimony. Knowing this, clients will want to work with a good divorce attorney to determine how state laws affect both their day to day costs, and how their retirement will be planned.
PEK: How do advisors begin the process of recommendation to clients who are separating; often when they may be losing one of them as a client?
AJ: As a financial professional you may not always know ahead of time if your clients are divorcing. But, once you find out, discuss the future state both logistically and financially. This can also be a very emotional and stressful time for clients.
People typically don’t include divorce in their financial plans, so their financial world may be turned upside down. Support clients effectively by making it clear that you will be a neutral party with whatever happens.
There may be times, depending upon the relationship established with clients, where you need to recommend a new professional to support them as well. It’s important to be open to both situations depending upon your client’s comfort level. Don’t take it personally if one of them decides to go with someone else. Instead ensure that the transition is smooth and they are fully supported with the divorce and their new future.
PEK: What does divorce look like today, especially ‘grey divorce’, and how is it different with regard to breaking up a financial/retirement plan?
AJ: ‘Grey divorce’ is happening more frequently today, it’s true. Those over 50 who have been married for many years are deciding it is no longer feasible to be happy while married to their spouse. Here again, married people typically plan to be married during retirement. These people are further along with retirement planning and may possibly have a larger disruption for their retirement when divorce happens. This can create a retirement shortfall that you will need to help them through by utilizing a solid financial strategy.
Divorce can be particularly life-altering for women. In fact, we found in our Allianz Women, Money and Power study that for 64% of women, divorce created a financial crisis for them. What’s more, nearly an equal amount of women (59%) thought that losing their spouse to divorce was a “wake up call” for them financially. While both genders feel financial effects of divorce, women tend to feel a greater financial impact. To make up for this retirement shortfall, it often depends upon what they are willing to change.
PEK: Does divorce necessarily mean financial ruin, for one or both spouses?
AJ: When we talk about divorce, it doesn’t have to create a crisis or ruin finances. It all depends upon how committed both parties are to making up for a retirement shortfall. There are 5 decisions clients can make that could help them with their financial situation:
1. Work longer/retire later
2. Spend less and save more now
3. Lower expectations and goals
4. Seek more return (create a more equity-based portfolio, utilizing annuities can provide additional security)
5. Create a combo of these choices
Specifically when looking at divorce’s effects on women, our study found that more than a third (34%) identified “running out of money in retirement” as a top worry that keeps them up at night. Not surprising, this fear was much higher for divorcees – half of all divorced respondents ranked it as their biggest worry.
Furthermore, divorced women said they struggle the most with saving enough to meet their goals. Sixty-five percent agreed it’s hard to save for both short- and long-term goals because they live paycheck to paycheck. This response was significantly higher than that from either single (51%) or married (47%) respondents. Key decisions need to be made as the divorce comes to fruition so your clients don’t experience this hardship.
PEK: Are there changes within the legal process of divorce today that may impact the dissolution of existing retirement plans?
AJ: A good divorce attorney would be the best resource for understanding current changes in the legal divorce process and how they relate to the dissolution of existing retirement plans.
PEK: How do you divide an annuity, if it is a marital asset?
AJ: If the annuity has been annuitized, some insurance companies may not be able to split the payment stream into two separate payments. Work with the insurance company to understand the options that are available to your clients.
For contracts that are not annuitized it ultimately depends upon the contract. For contracts that are in deferral, some insurance companies will allow the contract and its benefits to be divided.
Annuities that are paying an income benefit can be very difficult or impossible to split. So, it’s important to work with the issuing insurance company to understand all the options that the client has in their contract. In instances where a contract cannot be divided, the couple will need to look at dividing other assets to achieve an equitable divorce.
PEK: What are the ‘crisis strategies’ available to advisors for clients who might have to accelerate their income-growth plan?
AJ: There are many options available depending upon a client’s situation. If a client needs cash quickly one option would be to utilize the 72(t)(2)(C) rule within a QDRO. This is an IRS code that allows a client to take a distribution from a qualified plan that goes to an alternate payee (as laid out by the QDRO) without an additional 10% early distribution tax penalty. But, keep in mind that clients may still need to pay income tax or fees as they are laid out within the product’s contract.
When considering income-growth plans, educate clients on financial solutions, like a fixed index annuity, that could help them if they are looking for income that has the potential to increase. This would help keep a piece of their retirement portfolio secure no matter what the markets or the future holds.
PEK: How prevalent is the impact of debt when breaking apart a mature retirement plan?
AJ: Debt is very important to consider for a retirement plan – whether divorce occurs or not. During a divorce, all assets and debts are considered and make up the marital estate. Both assets and debt are also divided as part of the marital dissolution. If a divorcing couple is attempting to achieve a fair divorce, it can result in a division that is not necessarily equal, but fair. For instance, one person may really want the house, but this can hold a high level of debt (the mortgage) associated with it. The spouse in turn may get another asset with value similar to the equity in the home.
PEK: What are the realities of ‘surviving divorce’ for women today? For men?
AJ: For everyone going through it, a reality that I don’t think many people realize is that divorce is never “final”. Parties can always go back and request a revision of the divorce agreement if circumstances change.
Another reality for both genders to think about is that when a divorce occurs, it creates a new financial reality for both parties. There is a point when both sides need to start over with a new financial plan – from retirement to debt management to dealing with new expenses. There are real lifestyle changes that come with divorce and clients will have more success when they have solid support that creates a plan for their new reality.
When I think about women seeking support for their finances during a divorce, our study found that only 30% of them use a financial professional for guidance. But 75% of those who have one said they wish they had done it sooner. This is an impactful statement – what you do truly makes a difference in how prepared women (and men) feel no matter what happens in their future.
PEK: How does Social Security strategy, such as spousal benefits and pensions, play into the decision making of divorce?
AJ: Divorce impacts future income streams including Social Security. A key decision that needs to be made in a divorce is to understand what the lifestyle equity for both parties will look like in the future. How will each spouse’s lifestyle be funded after the divorce? Who is going to need more support to maintain their status?
Depending upon their income, don’t let clients overlook the fact that their Ex could get Social Security payments. For example, if a couple was married for more than 10 years and they are both currently age 62 or older, a spouse can collect a benefit based on 50% of the primary wage earners primary insurance amount (which is the amount that the primary earner will collect at full retirement age). In order to collect a spousal benefit like this, however, the spouse cannot be currently married. A solid financial plan will take income disparity into consideration with retirement plans. Find out more about spousal Social Security benefits at www.ssa.gov.
With the divorce decision, a judge will not only look at the current financial situation, but will also consider the projected net worth of both parties. What will each person most likely be earning in 10 years? Will their income likely increase or decrease? Will they have more or fewer expenses? Judges will look to create lifestyle equity both now and in the future, so a good financial plan will need to do the same.
PEK: 11. Are there any particular financial issues that arise when LBGT couples divorce?
AJ:The rights associated with marriage from a legal standpoint are no different for LGBT couples. On June 26, 2013 the United States Supreme Court ruled in Windsor vs. United States that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional. As a result, LGBT couples now have the same Social Security, tax, military, veteran, and immigration rights as heterosexual couples. Divorce should be viewed in the same way when looking at the financial and retirement plans for same-sex couples. ◊