Gray Divorce: Impact on Retirement

Divorce among older adults has more than doubled over the past twenty-five years (Moore, 2018). While there is much speculation about why this is happening from empty nest syndrome, to greater longevity providing an opportunity for a new beginning, the financial implications take front stage because they are significant at this time in one’s life.

Working Years Remaining

Gray divorce impacts income of the pre-retiree especially if there is only one earner spouse supporting two households.  Besides severely restricting the amount of spendable funds, a key consideration is the length of time left for income-earning years and, at the other end of the bar bell, the number of additional years of work necessary because of a prolonged retirement due to less earnings under a collective roof. Retirement typically has to be postponed because of the separate residences and living expenses of the divorced parties.

Older workers do not necessarily have the job security they once had.  They might be targeted for early retirement packages or may not be able to remain employed for health reasons, or may find that their skillset or function is no longer relevant at their company. Although working longer may be a necessity in gray divorce, it may not be a reality.  Importantly, while some jurisdictions have statutes that allow for no-termination-date alimony for long-term marriages (longer than 10 years) in practice, alimony may be reduced or discontinued because of these situations, adding further stress to the strained cash flow in gray divorce. 

For the non-working spouse, gray divorce frequently requires re-entering the workforce with outdated skills and in a low-paying position.  This impacts the quality of life of one in her late 50s and early 60s breeding resentment and affecting the emotional and psychological mindset in the pre-sunset years.

Reduced Retirement Nest Egg with 401(k)s and IRAs

Since the couples are so close to retirement age or already in retirement, divorce significantly cuts the retirement nest egg in half and there is less opportunity to replenish the funds and recover financially.  In addition, if there are any outstanding loans from the 401(k) they would need to be repaid leaving fewer assets to be divided and immediately accessible without any tax impact (such as early withdrawals from the 401(k)).

The ability to contribute additional funds to a 401(k) or IRA is contingent upon earnings.  For any spouse is still in the workforce, the maximum limitations on annual contributions to a 401(k) ($19,500 in 2021) will suppress the ability to restore the funds that were equitably divided.  Moreover, there are fewer years left before required minimum distributions are required (age 72) to grow those contributions tax deferred.

“Catch up” contributions to IRAs/Roth IRAs, are typically insufficient because of the annual cap ($6,500 if over age 50, 2021).  Gray divorce would greatly benefit with a provision allowing for a more significant catch up such as permitted with 529 savings plans. 

With 529 college savings plans there is the option of front loading five years of contributions up to the annual gift tax exclusion amount essentially, $75,000 per individual, $150,000 per couple (2021). Because of the division of retirement assets, this provision would be invaluable in gray divorce.  Using marital assets awarded to a non-working spouse, the IRA account could be replenished to produce tax-deferred compounded growth. The ideal repository for these funds would be the Roth IRA since the funds are already after-tax and would be distributed tax-free.  Even at ordinary tax rates upon withdrawal from a traditional IRA, only the growth would be taxable since there would be no tax deduction taken for the bolus five-year deposit.

Market Timing and Allocation

As if fewer funds for retirement was not impactful enough, even a moderate downturn in the stock market around the time of retirement (just before, at retirement, or just after) exacerbates the negative financial impact of divorcing in pre-retirement years. This is because there are fewer years to wait for a return of the stock market to pre-correction/crash levels.  The 2008 global financial crisis took 4.5 years to return to even. Individuals in their late 50s, early 60s, potentially do not have that length of time before having to sell assets for income in retirement.  Termed the sequence of withdrawal risk, this phenomenon can have a more deleterious effect on anyone at or near retirement and in the decumulating stage.  Since more assets must be sold at lower valuations to meet living expenses, fewer assets are  available going forward  that can appreciate and compound, and it may take years to recoup back to even.

Costly Reverse Mortgages and Reduced Legacy

Back to reality with the yet another implication of gray divorce and retirement.  This is the use of reverse mortgage and divorce. Especially in coastal areas where real estate is expensive, it is difficult to replace two homes with the proceeds from the sale of the marital home.  Reverse mortgages may need to be utilized to afford dual residences into retirement.  This technique requires high fees because of the initial mortgage insurance premium equal to 2 percent of the appraised value. There is less money available for legacy to heirs because the loan balance increases over time as interest on the loan and fees accumulate.  While the home may still be inherited, the beneficiaries will have to repay the loan balance.

Health Insurance

Often, gray divorce occurs before the commencement of Medicare eligibility at age 65.  In the years prior, one or both spouses may not be employed and receiving healthcare benefits through their employer.  Or, the non-working spouse may be entitled to a maximum of 36-months of the Consolidated Omnibus Budget Reconciliation Act (COBRA) provision pursuant to divorce.  After that period, if the spouse did not qualify for the Affordable Care Act exchange assistance, the premiums for elderly individuals would be astronomically increased because the individual’s premiums is based on age and incorporates both the employer and employee cost.

If one spouse continues working and the other is not in the workforce, the imbalance of premiums should be considered as part of the marital settlement agreement since healthcare costs are rising 13 to 20 percent on average annually.  This poses a significant cost to any non-working spouse prior to eligibility for Medicare.

Division of Assets

After many years and decades together, it may be difficult to identify and characterize marital property from separate property because of the commingling of assets through the years.  The stakes are higher because of the shortened time to retirement or loss of income-earning capacity as described above.  This may involve spending more time, legal, and tracing fees to recapture what was each party’s individual property. While preservation of each individual’s assets is prioritized, the end result may be fewer assets preserved ultimately. 

Reducing conflict and expediting the time to divorce reduces the expense of divorce which cannot be as easily replenished in gray divorce because retirement is on the horizon. It is to both parties’ benefit to approach the divorce as a business transaction, reducing the emotions, anger and resentment with the goal of resolving the divorce in a timely fashion to preserve as much wealth as possible for financial security in retirement.  While the pain and grief is real, focused attention is critical because there is not the benefit of time to recoup assets expended on divorce.

According to the Institute for Divorce Financial Analysis, there is a significant drop in the standard of living post gray divorce especially for women.  Women experience a 45 percent drop vs. 15 percent for men.

Social Security

For many who have worked throughout their years prior to retirement, Social Security will provide a tidy baseline of income once the divorced person reaches full retirement age. But if one of the parties left the workforce or reduced earnings because of the raising a family, there will be a disparity in benefits each has earned towards Social Security.

When couples retire, they have the added benefit of receiving both Social Security payouts for a more financially secure retirement.  The divorced spouse with fewer credited quarters of work or lower earnings may elect to receive the higher of one-half of her ex-husband’s social security benefits or 100 percent of her own.  Her receipt of her ex-husband’s benefits does not impact the 100 percent benefits he will receive upon claiming social security.

However, there are restrictions on this payment such as minimum age (62), not remarried, and divorced for a minimum of 2 years.  This places another burden on the non-working spouse to be able to have the cash flow necessary for living expenses until eligible (if at all) for the social security benefits of her ex-spouse to which she is entitled. She not only has to cope with reduced income until arriving at early retirement age to claim the benefits, but if she takes the benefits, she foregoes the handsome premium added to the monthly benefit for those who wait until age 70 (postpone benefits past full retirement age) to claim social security. Gray divorce could further exacerbate the disparity between spouses who may have had traditional roles in the long-term marriage.

Divorcing at any age is fraught with negative financial impact to most parties.  Unlike divorce at younger ages, however, grey divorce, is especially detrimental to financial well-being because of the shortened years to retirement. The major issues involve

·      the loss or reduced time to recoup retirement or other assets

·      the volatility of earnings and employment in this stage of life

·      the demands of two households supported by one income

·      the high cost of healthcare insurance prior to qualifying for Medicare

With prudent awareness of the impact of gray divorce, marital settlement agreements may be negotiated with more equitable terms and with greater attention to the ramifications of the divorce on each party’s financial well-being post-divorce.

This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.