Are you going through a divorce as a retiree?
A divorce later on in life can wreak havoc on even the most well-thought-out retirement plans. You were once happy and planned a future together with your spouse. Now you’re 55 and heading towards a possibly messy divorce.
Or maybe you’re in your 60’s or 70’s and are now part of a trend called “Gray Divorce.” A dissolution can worsen and create many vulnerabilities for retirees.
Studies show that people who divorce earlier in adulthood have more time to rebuild the financial losses that divorce usually comes with. But those who divorce later have fewer years of working life remaining and may not be able to fully recover economically from a divorce.
Divorce in retirement is when resources are diminished, household income has dropped, assets and cash flow have been reduced, and spouses may find themselves powerless.
This is a severe planning concern. Financial planning was important for retirement before the divorce, and it can be even more critical now if you’re going through a separation. So let’s look at some tips for surviving this hump in the road!
…Keep reading to get 5 tips that will help you out!
Accept That Your Lifestyle Might Have To Change
While anyone’s lifestyle can take a hit in divorce, the impact may be permanent if you are older. After your divorce is final, you’ll probably have to downsize a few things in your life. You might need to delay your retirement or forget about retiring entirely.
You might even need to learn how to budget a bit better. Or, you may need to learn to do more with much less. Yes, all of this is a bummer.
It’s a pity that your golden years may not be as golden as you might have imagined. But denying your new financial reality won’t help you at all.
Unless you deal with the changed economic circumstances that your dissolution causes right away, you may come to realize that you will have outlived all your income and assets in a few short years. That will be even worse!
How Well Do You Understand Social Security?
Many older divorced employees receive a steady source of income from Social Security. You’ll need to decide whether you want to receive the Social Security benefits you’re entitled to or if you’ll want to receive half of your former spouse’s benefit.
Under certain conditions, you can receive benefits based on your former spouse’s employment record. You can find more information on this here.
The requirements are as follows: if your marriage lasted over 10 years and you’ve been divorced at least two years; you haven’t remarried; you’re aged 62 or older, and you’re not eligible for a higher benefit based on your or someone else’s work.
Collecting half of your former spouse’s social security doesn’t reduce your ex-spouse’s benefits, even after your dissolution is final. This is a good choice for women who didn’t work during marriage or worked in a career that didn’t bring in a high income.
Understand Your Projected Post-Divorce Finances
Before you agree to any settlement, you must understand your financial picture first. This includes understanding your current situation AND the one that will follow after you finalize your divorce.
Rushing into a divorce settlement without knowing it won’t provide you with enough cash to live on after your divorce can be your life’s most significant financial mistake.
HINT: Working with a financial planner on this BEFORE separating can make a massive difference in the quality of your economic life after your divorce.
For instance, splitting up your property in your divorce and spousal support may have tax implications that will impact how much money you have available after your dissolution.
Understanding how taxes will affect your post-divorce finances is critical to ensuring that you have enough money to live on after you separate. You also need to consider whether you can afford to keep your house. Losing your home may be emotional.
But you also don’t want to end up homeless. You also don’t want another financial hit when you have to sell the house later because you couldn’t afford the payments.
Increase Your Cash Flow
Reducing a few expenses and saving up some money can improve the odds of retirement success. Not carrying a mortgage into your retirement can also help after a divorce when sources of income are limited, and healthcare costs are most likely much higher.
A reverse mortgage may also be used as a strategy in your separation to help in planning out your retirement.
Cash flow is always a concern during and after a divorce process because the resources put aside to support one household are now supporting two, and filing single on taxes could reduce the net income that’s available for your living expenses.
Consider a HECM reverse mortgage as a potential tool if you are over the age of 62 because it can be used to generate income to bridge a shortfall in your spending plan, allow the delay of claiming Social Security, or help facilitate the purchase of a new home for one or both spouses.
A reverse mortgage can even protect against sequence risk, and declines in your portfolio have benefits over HELOC or could be used as part of LTC planning to stretch out your retirement assets.
One of the most paramount decisions made during the divorce process is identifying and splitting your assets. A few things to think about:
- Which assets and debts are separate or marital?
- Are your assets liquid: do you have or will you need access to cash?
- Are asset division decisions based on an “after-tax” basis, so you compare apples to apples when determining what is equitable?
- Retirement splitting: Is a QDRO needed? A DRO? An MRO? If this is a divorce involving a service member, are you a 10/10/10 or 20/20/20 spouse? Should you file something with the Defense Finance Accounting Service for the survivor benefit program?
- What social security benefits are you qualified for as a divorced spouse? How does the Windfall Elimination Provision impact your social security benefit?
- Does your spouse agree to take over any debt, and can you still be held responsible for those debts if they don’t pay? What if they file for bankruptcy?
- Are there things on your tax return like depreciation, passive activity losses, long-term carryover losses, or operating loss from a company that needs to be negotiated?
- Are you taking over a rental property as your primary home after the dissolution?
- What changes will you have to make to your estate? This includes wills, trusts, power of attorney, healthcare proxy, asset retitling, and account transfers.
- How does credit or tax law differ from divorce law?
Takeaway: Divorcing Later in Life Isn’t Easy
No matter what you decide to do or who you are, getting a divorce after the age of 50 is going to impact you emotionally, socially, financially, and legally at a level that’s very different than how you would have been affected if you got a divorce when you were 25.
If you want to get through this phase of your life with dignity, grace, and SOME level of financial security, it’s worth taking the time to understand what you’ll be facing. Invest in some professional help.
Get the support you need from family and friends. All of that will affect the decisions you make throughout your divorce. The quality of your choices will, in turn, directly affect the quality of your life well into the rest of your life.
No matter what the outcome will be in the end, you should do what is best for YOU! Something else to consider: 5 Best Spending Strategies in Retirement