Over 50 and living solo, maybe for the first time in decades? If this is you, you’re not alone. The number of older Americans living alone is growing rapidly, fueled in part by another rising trend: gray divorce.
Gray divorce (or silver splitting) refers to the increasing divorce rate among older couples in long-lasting marriages. Pew Research Center found that from 1990 – 2015, the divorce rate doubled among adults 50 and older. For Americans over 65, that figure has roughly tripled for the same period.
Divorce at any age is difficult, but ending a marriage later in life presents unique challenges, especially for your finances. You’ve spent years accumulating wealth and planning for retirement together. Now, you have to make difficult decisions about dividing retirement accounts, property, and retirement savings and funds that you had intended to share and rely upon in your later years. Divorce may impact your retirement income, but we are here to help you retirement plan for that.
This article outlines the key financial issues to consider to ensure your financial security post-divorce. With the right strategy and guidance, you can navigate this transition successfully.
The rising trend of late-life splits
There are many reasons behind the shift towards more older Americans calling it quits on their marriage. In many cases, long-term couples say they’ve simply grown apart. Once the kids leave the home and the nest is empty, you may realize that raising children was what kept you together.
This realization, paired with changing social norms that make divorce less “taboo” than it was in, say, the 1970’s, is seeing more couples part ways later in life. Rather than live unhappily, people over 50, 55, or even 65 are choosing to split so they can live life on their own terms. It makes sense, given increasing life expectancies, that you’d want to enjoy your remaining years “your way”.
No matter the reason, gray divorce has major implications for your personal and financial life. As an older divorcee, you likely have adult children and maybe even a few grandchildren. And in most cases, there will be significant assets, accumulated over a lifetime, which you’ll need to divide.
Divorce is often a financial detriment to both sides. A post-divorce financial plan can help ease this transition and ensure both parties’ needs and interests are properly addressed.
Tax implications of a gray divorce
Once the emotional dust settles, it’s time to face the financial facts. Your divorce will impact tax filing in a few unique ways.
In general, your filing status depends on whether you’re married or unmarried on the last day of the year. The IRS states, until you get a final decree of divorce or separate maintenance, the IRS considers you “legally married” for filing purposes. So, if you’re legally married at the end of the tax year (December 31st) you must file as married for that tax year and choose a filing status:
- Married filing jointly
- Married filing separately
- Head of household
While “married filing jointly” generally produces the largest refund or smallest liability, certain circumstances—such as if you and your spouse have similar incomes—may make it advantageous to file separately or as head of household. You must meet certain qualifications to file as Head of household while still married.
If you have any dependent children, the custodial parent usually claims them for tax purposes, along with the associated financial credits. If you split custody 50/50 and aren’t filing a joint return, you’ll have to decide which parent gets to claim the child. The IRS outlines tie-breaker rules in case you and your ex can’t agree. Keep in mind, child support payments aren’t deductible by the payer, nor taxable to the payee.
Alimony and spousal support
You and your ex may not agree on what’s “fair” when negotiating spousal support. Factors the court considers include need, standard of living, ability to pay, age and health of both parties, and length of the marriage.
For example, what if one spouse has given up a career or further education during the marriage (usually to raise children)? Or when there is uneven income potential overall? You (or your ex) may need to consider the possibility of retraining and re-entering the workforce.
Your house and other real estate in divorce
“Who gets the house” is often the largest contention between parties in a divorce. One or both of you may be attached to the neighborhood, the home itself, and the many memories of raising children there. Still, you’ll need to make important decisions regarding your home and any other real estate you may own with your former spouse.
Keeping the home
California is a community property state, which means all assets accumulated during the marriage (including your home) are split evenly in a divorce. This means the person who keeps the home will have to buy out the other spouse’s share of the equity. You can do this through refinancing the mortgage in just one spouse’s name or taking out a new mortgage. Then, use the funds from the new loan to pay the other spouse their share of the equity.
Selling the home
Although one spouse may prefer to keep the home, the costs of maintaining the home and ongoing expenses like maintenance, insurance and property taxes often make this unrealistic. Depending on your situation, you might both be better off selling and getting something new.
If selling the home, you’ll split the proceeds according to the division of assets in your divorce settlement. The equity from selling a larger property can provide each spouse a substantial down payment on a new place. Sometimes the sale is postponed until the last child leaves the home. In this case, it’s important to have the details and timing of the division documented in advance.
Other real estate
If you have any other jointly owned real estate, such as investment or rental properties, you’ll need to address those too. For example, you can either sell the properties and split proceeds per the divorce agreement, or one spouse can buy out the other’s share to retain full ownership.
How divorce impacts your retirement assets
Besides a home, retirement accounts are often a couple’s most valuable assets—particularly if you’ve been married a long time. If you’re going through a divorce, you need to consider how it will impact your retirement savings and plan accordingly.
Division of retirement assets
In community property states, retirement assets like pensions, 401(k)s, and Roth IRAs are considered “marital property”. So, all retirement savings accumulated during the marriage are split evenly. Anything that was in the retirement account prior to the marriage is not split.
For example, let’s say you had $150,000 in an Roth IRA before getting married. By the time you get divorced, that $150,000 has grown to $500,000. The original $150,000 is yours. But the difference will be considered marital property because it was accumulated while you were married.
In common law states, the court considers both spouses’ future financial needs and earning abilities when determining an “equitable” division.
Division of retirement accounts during a divorce should be tax free, as long as you file them correctly with the courts:
- For Roth IRA, you must specify that the division should be treated as a transfer incident due to divorce
- For qualified (employer-sponsored) plans, use a qualified domestic relations order, or QDRO
Lastly, make sure to update beneficiaries during the divorce to ensure your assets don’t end up with your former spouse.
Impact of divorce on pensions
Pensions are less common than they used to be. But if one partner has one, it’s often a major (emotional and financial) asset. Unless you have a valid prenuptial agreement, pensions will also fall under marital property.
If you don’t want to hand over half of your pension, consider offering your spouse other assets as a compromise. Or, if you both have pensions, but they’re of unequal value, whoever has the larger pension can offer to make up the difference. For example, you could purchase a single premium life insurance policy and name your former spouse as the beneficiary.
Either way, you’re offsetting the amount by offering something of equal value, and making things less complicated than divvying up pension assets.
What are your options if you co-own a business with your spouse?
If you co-own a private company with your former spouse, you have a few options to consider regarding your shared business ownership.
Sell the business
If the two of you decide to sell the business, you’ll need to determine an appropriate valuation. Doing so can be a major source of disagreement in a divorce. There’s more than one method for determining business valuation, and depending on the type of business you have, one approach may be more suitable than another.
And since you’ll be losing future income and growth potential from the business, ask yourself – “Do I have a plan for how to earn money after the sale?
Buy out your ex-spouse
Another option is to buy out your ex-spouse’s share of the business, or vice versa. This depends on whether you want to sever your ties to the company (and get a lump sum of cash). Or if you prefer to retain full ownership and control. And of course, whether you both can come to an agreement.
If you’re selling your interest, keep in mind the buyout amount may be less than the actual value of your share. Conversely, if you’re buying them out, you need to have enough cash on hand to purchase their share.
Continued co-ownership is another possibility, if the split is amicable. While this does remove the valuation challenges, you’ll need to be brutally honest with yourself about whether it’s a sustainable option. It may be beneficial to draft a new operating agreement with clearly defined roles and responsibilities.
Moving forward – you don’t have to do it alone
Although your marriage is ending, you still share a financial history and obligations to each other—and dividing up a lifetime’s worth is no simple task. Your new financial independence is empowering, but also uncertain, not to mention emotional .
The decisions you make in divorce will affect you for many years to come. Professional guidance and oversight can help both parties understand the changes, facilitate challenging conversations, and prepare to reorganize their finances after the split. Compromise is often the best way forward if you want to preserve financial resources and protect your future retirement.
If you’re focused on understanding the numbers and you desire a fair and efficient process, consider working with a financial planner who specializes in divorce planning. A Certified Divorce Financial Analyst (CDFA®) is a trained expert in the financial aspects of divorce. And they can act as a neutral third party. Book a meeting with our Certified Divorce Financial Analyst (CDFA®).