The top questions to ask when couples face late-life separation
by Lili Vasilef
Ms. Vasileff is President of Wealth Protection Management, based in Greenwich, CT, a mediator, Certified Divorce Financial Analyst, and litigation divorce financial expert. She is a nationally recognized speaker, practitioner, writer, and author of three books on divorce, including: “Money & Divorce: The Essential Roadmap to Mastering Financial Decisions” published by the American Bar Association. Lili is the co-president of the national Association of Divorce Financial Planners (ADFP). Her awards include the prestigious 2013 Pioneering Award for outstanding public advocacy and leadership in the field of divorce financial planning. Visit www.wealthprotectionmanagement.com.Longer life expectancies, personal expectations for fulfillment in later years, and the increased trend in gray divorce, all challenge the effort for personal retirement planning. Accumulating assets necessary to live comfortably beyond one’s working years requires planning. But what happens when those assets are split in a divorce and income has to maintain two households? Divorcing on the cusp of retirement takes place in peak earning years with a lifestyle reflecting the accumulation of wealth.
It is a powerful reckoning for clients to realize that peak earnings funding a household’s mature lifestyle may not last longer than a few years and may be insufficient to support two post-divorce. The efficacy of their retirement planning may be sorely tested if not destroyed by divorce. This article focuses on the decisions many need to make that affect retirement security and suggests how these issues should be addressed during the divorce process before reaching final settlement.
Retirement is the beginning of a whole new chapter in life, and when coupled with divorce, another major life event, represents significant transition in lifestyle, family relationships, and financial wellbeing. Among U.S. adults between ages 50 and 64 (Boomers), the divorce rate has increased 4X in the last three decades[1]. The increase in breakup rates is in first marriages. More than 55% of gray divorces occur with couples married for more than 20 years and 12% for marriages spanning over 40 years. Divorce statistics for remarriages are even more pessimistic, rising to 60% for second marriages and 73% for third or more.
The Meaning Of Divorce For Older Couples
What does divorce mean for older couples? Major concerns include worrying about spending on health care and the need to downsize, anxiety about what happens when no longer earning income, and apprehension about achieving financial independence.
Late life divorce is different because there is a shorter time horizon to replenish savings before retirement. It is tough to generate higher earnings in a career late in life as well as daunting to get back into workforce if having been a homemaker and out of the work force for many years. One should not underestimate the emotional pain that also comes with divorce: inexperience with becoming self-sufficient, psychological and emotional depression.
Without proper guidance, gray divorcees may be sacrificing and compounding the risks for their own future security. Here are some of the right kinds of questions that need to be asked during the divorce to address potential landmines in key financial areas.
Is the divorcing couple realistic about the amount of alimony and the duration? Alimony is usually based on the length of marriage – by formula or a case-by-case basis weighing factors enacted by statute in each state. For marriages of 20 years or more, a court may award permanent alimony, depending on the age of the spouse receiving it, or, another commonly used standard is 1 year of alimony duration for every 3 years of marriage. With fewer working years until retirement age, the duration of alimony paid by the income earner may be much less than expected or needed by the recipient.
While this comes as a surprise, it is important to further inform your client about the impact of working past retirement age while collecting alimony. If the alimony recipient must work past retirement age out of necessity to secure health benefits or additional income, it may be possible that the alimony payor seeks to modify downward their alimony obligation because of the change in financial circumstances. A stay-at-home spouse often pays a penalty in retirement because they didn’t work enough to qualify for Social Security benefits on their own; and if they qualify, they receive just one half the SSA benefits of their husband. If the alimony recipient must work and receives Social Security benefits, their income may be high enough to have Social Security benefits reduced dollar for dollar and/or taxed at state and federal levels. This information is essential to know for planning purposes during negotiations about support.
Alimony In Jeopardy
A few more things can jeopardize an alimony obligation: death, remarriage and cohabitation. It is not unusual to be in a different marriage or relationship during retirement than during one’s working years. The trend in remarriage among adults ages 55 and older has increased substantially. In 2013, two thirds (67%) of previously married adults ages 55 to 64 had remarried, up from 55% in 1960[2]. The share of adults cohabiting in relationships has risen across all ages; for adults ages 50 and older, it has risen 75% since 2007 and represents almost a quarter (23%) of all cohabiting adults in the U.S.[3]
A variety of economic issues accompany the decision to live together but not marry. Social Security benefits are available to divorced spouses who haven’t remarried (meeting all other criteria). Health insurance may be available only to spouses and not to partners. From a family law perspective, alimony may end with the recipient’s co-habitation if the alimony receiving spouse is in a “supportive” relationship such that the need for financial support from the payor-spouse is reduced or diminished. When the challenge of co-habitation arises, former spouses are often at serious odds with one another. Co-habitation is ill-defined, but contemplating the future and spelling out specific definitions in divorce agreements could be helpful to alleviate future allegations and legal costs.
How will clients replace earned income or alimony during retirement? Prior to the pandemic, a significant number of workers said they planned to work well past the traditional retirement age of 65[4]. We recognize however that the impact of the pandemic has forced older adults out of the work force because of health risks and economic disruptions. Those displaced have a difficult time finding employment, probably even after the economy recovers; they are effectively pushed into early retirement. Almost 1 in 4 women workers say their retirement confidence has declined in light of the coronavirus pandemic. 18% have taken a loan and/or early withdrawal from retirement accounts or plan to do so as a result of the pandemic.[5]
Others who are resilient financially, are less likely to be struggling. Many older adults become entrepreneurs by choice and technology facilitates these connections easily. The biggest risk is uncertainty about replacing earned income.
Most people do not know how much they will need during retirement. According to a Transamerica Institute 2020 survey, 51% of women simply guessed. Yet, money issues ranked as the number one worry for women during divorce, even topping concerns for children.
Maximizing Cash-Flow
How can divorcing couples maximize cash flow from all sources and assets? Here some are strategies unique to the divorce process. Under Section 1041 (a) of the Internal Revenue Code, ex-spouses can transfer property to each other without recognizing gain (or loss) on the transaction. These transfers are generally treated as nontaxable events for US Federal income and gift taxes. In divorce, you have only one shot to get it right for property division. One has the opportunity to negotiate for key assets, like sharing “golden” annuities and pensions. These assets offer future streams of income, choices for payout elections (term and amount) and preretirement survivor benefits. Retirement accounts similarly can be transferred but we must ensure direct transfer from custodian to custodian to avoid unintentional distributions that are taxed (plus possible 10% penalty). Raising the idea of a ROTH IRA conversion during the divorce process may be appealing while the couple is still married in order to share the tax impact using marital resources.
If one spouse or both need immediate liquidity to pay debts or living expenses or funds to buy a new home, one can take cash out of a retirement plan “penalty free” using 72(t) payments per the IRS pursuant to divorce. Another choice is to tap into whole life insurance to take cash out or leverage cash value with a loan against the policy, surrender the policy, or sell the policy in a life settlement or viatical settlement. While an alimony payor is usually obligated to have life insurance in place to secure the obligation, there is rarely a requirement for it to be whole life. Finally, with the divorce rate climbing steadily for older couples, a reverse mortgage might be a part of the planning. A reverse mortgage is a loan secured by the borrower’s residence with required repayment deferred until the borrower leaves the home permanently. The loan proceeds can be taken as a lump sum, a line of credit, in an annuitized form, a lifetime or term of monthly payments, or any combination of these forms for the purpose of buyout of the other spouse’s equity or for funds to purchase a new home.
What is often overlooked in dividing property that impacts future cash flow? The hidden treasures of cash equivalents such as reward & mileage points, timeshare credits, tax loss carryforwards, HSAs, cash rebates, etc. On the other hand, do not overlook the blind spots that may include items such as depreciation recapture and tax liability on selling investment & vacation properties post-divorce, which can easily diminish the value of your property settlement and cost you out of pocket in the future.
Planning For Health Care
Do they have a plan for health care and its affordability? If one spouse had been covered under their spouse’s workplace health insurance, they have a choice to make: obtain coverage independently through the Health Insurance Marketplace (Obamacare), or stay on their ex-spouse’s insurance under COBRA. COBRA typically offers the same health insurance coverage for a period of 36 months for a divorced spouse. The three-year extension applies to people of any age, but it can be an especially valuable feature for people who are nearing retirement but not yet eligible for Medicare.
Health care costs are a top retirement concern and the number one issue that keeps people from divorcing in later life because of the potential cost or loss of health insurance. Smart ways to plan for the cost of health care is to make sure to stay insured, revisit insurance options over time, add to an emergency fund to cover unexpected medical expenses, and sharing or funding a health savings account (HSA) on their own or at work.
Retirement can be about having the time to enjoy things you have always wanted to do and thriving post-divorce. Retirement concerns can be eased greatly during divorce by planning ahead and laying a good foundation for financial security. Divorce financial planning for late life divorcing couples has the potential to eliminate the biggest financial concerns about retirement.
[1] https://www.apa.org?topics/divorce
[2] Pew Research Center Social & Demographics Trends: Chapter 2: The Demographics of Remarriage, November, 2014
[3] Pew research Center, FactTank News in the Numbers April, 2017
[4]Gallup May 2017
[5] Retirement Security for Women amid Covid-19, Transamerica Institute, August 2020.
