July 1, 2014
There is no formal definition of a “gray divorce” or, as it is otherwise known, a “late in life divorce” but these terms are commonly used to describe divorces involving couples in their 50’s or older. Personally I feel “late in life” is a misnomer as a 50-year-old could easily live another 30-40 years, and I think sometimes a better description would be “late in work life” divorce. Because many of the issues that are particular to older divorcing couples stem from the fact that neither party has more than 10-15 years at the most to make up for lost income or assets, and that is only if they are still working. If one or both parties are retired, the opportunity to regain the pre-divorce lifestyle becomes even more difficult.
Let’s look at Joe and Helen, both 57, who have been married for 32 years. Joe has been the primary wage earner during the marriage as an ad agency executive, and earns over $100,000. Helen worked part-time in marketing before they had children and re-entered the workforce 8 years ago also on a part-time basis. She earns $25,000.
For couples such as Joe and Helen, the primary focus is on their cash flow. Can they each sustain their new single lifestyle on their own income? Younger individuals have more years ahead of them to upgrade work skills if necessary in an effort to increase their income. For Helen however, it may not be feasible for her to spend 2-3 years in school. In our example Helen has past work experience and some career skills, but it is often the case that the wife has been a homemaker for many decades and has little marketable skills to gain her a place in the workforce.
Therefore women such as Helen may need to draw on the assets they receive in the divorce right away. If these assets are retirement accounts there will be taxes and penalties for withdrawing before age 59 ½. This puts Helen in a tight situation.
Medical insurance is another focus of gray divorce. Because Helen works part-time she doesn’t have company benefits. Again this is an issue that affects many older divorcing couples because the spouse without medical insurance may not have the opportunity to secure a job that offers insurance. This creates a gap in coverage between the time of divorce and age 65, when Medicare kicks in. The cost of health insurance becomes a big issue: what are the options for securing insurance and who is going to pay for it? Some couples decide to separate and not divorce so that the uncovered spouse has insurance at a reasonable cost. With the new Affordable Care Act this may change.
In a long-term marriage, where the couple has been saving and planning for retirement for many years, a divorce can hinder those plans for both parties. The assets acquired during the marriage may be enough to sustain a couple in retirement, but not two individuals separately. And both parties have little or no time to make up for the change in plans. Now they are faced with adjusting their plans for retirement to reflect their new account balances.
Knowing the Social Security laws is very important for older couples who are approaching the age of collecting benefits. Each is entitled to their own benefit or a benefit equal to half of the other spouse, whichever is greater. Social Security offers divorced couples an opportunity to increase their own benefit by collecting a benefit based on their ex-spouse’s record temporarily and delaying their own benefit until (at most) age 70. The rules are a bit complicated and you should consult a financial adviser or call the Social Security Administration before giving advice in this area.
With younger couples the focus in the divorce might be on upgrading job skills or parenting plans. The focus on older divorcing couples is often making sure they can each survive on their half of the pie. Good financial planning is essential to a happy outcome for everyone.
Use of any information in this newsletter is for general information only and does not represent personal tax advice either express or implied. You are encouraged to seek professional tax advice for personal income tax questions and assistance.
