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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.

Ellen, a homemaker and her husband, Bill, felt financially secure when Bill retired. He chose not to annuitize his pension and took a lump sum rollover, so their IRA was $1,000,000. They had a mortgage of $250,000 on their home worth $600,000, with monthly payments of $1,500. Their combined Social Security income was $3,900 per month, plus they took $2,500 from their IRA each month (a withdrawal rate of 3%), resulting in monthly cash flow of $4,900 after their mortgage was paid.

In the divorce settlement, Ellen ended up with $500,000 in a rollover IRA, $175,000 in cash from her half of the sale of their joint home, and her Social Security spousal benefit of $1,300 per month. The need to downsize to a smaller residence was difficult for her to accept as she always took great pride in her home and had strong ties to the neighborhood. She has found a replacement house for $300,000 that she thinks she could live in. You present her with the following bad news:

1. She won't qualify for a mortgage with Social Security as her only source of income.

2. She needs her liquid assets to fund her living expenses, so she can't use all her cash to buy real estate--and taking funds from the IRA to put down on the house will create a huge tax burden.

3. She'll have to rent an apartment or house that is in her budget--and not in her neighborhood.

4. Her Social Security income plus a 3% to 4% withdrawal from her total assets of $675,000 will provide only $3,200 to $3,700 per month to live on.

With total annual cash flow of $44,000 or less, Ellen is in real trouble. She is paying a high price for her new-found freedom.

The Emotional Toll
In addition to the financial issues, both men and women worry about the welfare of their children. It's a myth that older children cope better than younger ones and, in fact, the emotional turmoil that occurs from divorce is particularly difficult for children who have children of their own. Adult children struggle to balance their relationship with both parents, frequently being forced to take sides, while trying to explain the situation to their own children and preserve their connection with their grandparents. The upheaval can affect all future family events and gatherings, and the prospect of a parent remarrying can put all of the heirs at risk of losing their inheritance.

Men and women going through divorce also fear the prospect of being alone--especially as they face their declining years. The loss of companionship--having someone to do things with and talk to--can lead to depression and a sense of isolation. Since only about one-third of divorced people remarry, the possibility of remaining alone is very real.

***

The decision to seek a divorce is an intensely personal one and involves many factors. The most valuable service advisors can provide is illustrating the financial impact of living separate lives, so clients can realistically evaluate the true cost of divorce.

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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