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Tarnishing the Golden Years with a Silver Divorce

Divorce can come with a very high financial cost for couples near or in retirement.

Helen Modly,Sandra Atkins, CPA/PFS, 06/14/2012

While divorce rates in the U.S. have declined overall in recent years, it appears that divorce rates for seniors are on the rise. Many of these break-ups occur after retirement when people are living on Social Security, pensions, and their portfolios. You may have clients who have worked hard to build their retirement accounts, live in their long-term family home, and want to leave a legacy for their children and grandchildren--but all of these are threatened when divorce looms. They will look to you to help them through this traumatic process.

Is It Him or Is It Her?
You may think that most "silver divorces" of older couples result from the husband dumping the wife of 40 years for a younger woman. Surprisingly, many of the late-in-life divorces are initiated by the wife who wants out of a long-term unhappy marriage and relishes the thought of pursuing an independent life with freedom to do what she wants to do.

Many couples have held their marriage together for the benefit of their children, and once they are out of the house, the couples are ready to call it quits. Others realize that their vision of retirement is drastically different--she wants to stay in the community to spend time with the children and grandchildren, while he wants to move to Florida and spend every day on the golf course.

The initiator of the divorce, who is just as likely to be the wife as the husband, may anticipate a feeling of freedom and independence from being on his or her own. Women especially may create a new self-identity where they can finally focus on their own needs without having to constantly compromise with another person. This change in attitude, along with the possible addition of a new partner/spouse, can totally change the dynamics in a family, and can come with a very high financial cost.

The Financial Toll
When divorce happens later in life, your clients have little or no time to make up what is lost when the joint property is divided. It's always a challenge for divorcing couples to figure out how to pay for two households with the same income that previously supported just one. But when you're on a fixed income, with no prospect of generating future earnings from work, the likelihood of having to significantly trim back your lifestyle is very real.

The divorce process for retirees is similar to divorces for younger couples, without the issues of custody and support of minor children. The marital property--such as the investment accounts, IRAs, and personal property--will most likely be split evenly between spouses. The easiest way to split the marital home is to sell it and divide up the cash. When one spouse wants to continue to live in it, he or she may have difficulty qualifying for a new mortgage if there is not enough retirement income.

With respect to income, if the wife never worked, she will still be eligible for her spousal benefit of one-half of her husband's benefit after the divorce, as long as they were married for at least 10 years. The more complicated issue relates to pension income if it is already being paid out to the recipient. Typically, the monthly benefit can be split for an ERISA plan using a Qualified Domestic Relations Order (QDRO) and for a Federal pension using a Court Order Acceptable for Processing (COAP). These documents must be prepared by attorneys experienced in this area, as poorly drafted orders can nullify benefits, fail to allow for proper distribution, and cause the surviving ex-spouse to lose the survivor benefit altogether.

The High Cost of Freedom
Clients who are living fairly comfortably in retirement may have a hard time adjusting to the idea that they cannot continue the same lifestyle. Let's say Ellen comes to you right after her divorce is final. As the initiator of the divorce, she is enjoying the sense of freedom and independence from being on her own. Soon after Bill retired, Ellen realized that they had very little in common. He wanted to spend all his time in the basement fiddling with his airplane models, while she wanted a more active lifestyle spent traveling with friends and family.

Helen Modly, CFP, ChFC, is executive vice president and director of investment services for Focus Wealth Management, a fee-only registered investment advisor in Middleburg, Va. Modly has more than 20 years of experience providing wealth-management services. She is a member of NAPFA and FPA. She can be reached at info@focus-wealth.com.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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